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International Financial Services Centres Regulations – An Overview

13 Sep 2021

The International Financial Services Centres Authority (Issuance and Listing of Securities) Regulations, 2021 were recently notified to provide a consolidated issuance and listing framework (under the jurisdiction of a single regulator) for accessing capital markets by various entities at International Financial Services Centres.

International Financial Services Centres (IFSCs) are special economic zones in India set up with the intent of catering to international market participants in the financial services economy, and to promote ease of doing business. IFSCs enjoy various fiscal benefits, including in relation to taxes levied In 2019, the International Financial Services Centres Authority Act, 2019 (IFSCA Act) was enacted to provide for the establishment of the International Financial Services Centres Authority (IFSCA), a statutory authority to develop and regulate the financial services market in IFSCs. As the dynamic nature of business required inter-regulatory consolidation, IFSCA was set up as a unified regulatory authority which exercises powers of various other regulators such as Securities and Exchange Board of India (SEBI), Reserve Bank of India (RBI), etc. in so far as such powers relate to the regulation of the financial products, financial services or financial institutions in IFSCs. The objective of the IFSCA is to develop a strong global connect and focus on the needs of the Indian economy as well as to serve as an international financial platform for the entire region and the global economy as a whole.

The IFSCA, on 16 July 2021, notified the International Financial Services Centres Authority (Issuance and Listing of Securities) Regulations, 2021 (Regulations), superseding the Securities and Exchange Board of India (International Financial Services Centres) Guidelines, 2015. The Regulations provide a consolidated regulatory framework (under the jurisdiction of a single regulator, as the erstwhile regulations were prescribed by SEBI) for accessing capital markets by issuance and listing of securities by various entities.

Pursuant to the Regulations, companies incorporated in India, an IFSC or in foreign jurisdictions are eligible to list their securities on stock exchanges established in IFSCs (IFSC Stock Exchanges). Further, entities and SMART cities notified by state or central governments, and entities whose securities are irrevocably guaranteed by a Sovereign, are also eligible to list their securities. Currently, there are two IFSC Stock Exchanges i.e. India International Exchange and NSE International Exchange.

The Regulations provide for various avenues to access capital markets through IFSC Stock Exchanges (including those which are prevalent in international markets). These avenues include extant structures such as initial public offerings (IPOs), follow-on public offerings (FPOs), preferential issues, rights issues, issuance of depository receipts and debt securities (through IFSC Stock Exchanges). Some new avenues that have been introduced include listing of securities by start-ups, secondary listings, IPOs by Special Purpose Acquisition Companies (SPACs), Environment, Social and Governance (ESG) debt securities, masala bonds and medium term note programmes (through IFSC Stock Exchanges).

We discuss below some of the key aspects of raising capital in IFSCs.

Special Purpose Acquisition Companies

The Regulations have introduced the concept of a SPAC in India, i.e. a company which does not have any operating business, and has been formed with the primary objective to affect a merger or amalgamation or acquisition of shares or assets of one or more companies having business operations (Business Combination).

A SPAC is eligible to list its securities by way of an IPO, if (a) it has not identified the Business Combination prior to the IPO, and (b) it complies with certain provisions of redemption and liquidation of the SPAC as well the SPAC proceeds. The SPAC also requires a “sponsor” i.e. a person sponsoring the formation of the SPAC.

In terms of the eligibility criteria, the sponsor cannot be debarred from accessing the capital market, or be declared as a wilful defaulter or fugitive economic offender. Further, the sponsor is required to have a good track record in SPAC transactions, business combinations, fund management, or merchant banking activities.

A SPAC listing is required to follow a similar process as has been prescribed for an IPO in an IFSC under the Regulations. Similar to an IPO, a SPAC is required to file an initial offer document, which contains customary disclosures typical to public offerings. Additionally, a SPAC initial offer document is required to contain specific disclosures pertaining to liquidation, redemption rights, track record of sponsors, target business sector, and time period for completion of the Business Combination. The SPAC is also required to file a detailed prospectus with the IFSC Stock Exchange, containing all relevant disclosures regarding the proposed Business Combination, while seeking shareholders’ approval, including information about (a) target company, (b) Business Combination transaction, (c) valuation and methodology used, (d) process for the business transaction, (e) the approvals which are required, and (f) information about the resulting issuer company that would be formed after completion of the Business Combination.

Unlike an IPO where pricing can be undertaken by way of book building, a SPAC envisages a fixed price mechanism only. The underwriters involved in a SPAC are required to defer at least 50% of the underwriting commission until the successful completion of the Business Combination (by depositing it in an escrow account). In case of a liquidation, such deferred commission is waived.

The minimum issue size is required to be USD 50 million. Further, the sponsor is required to hold a minimum of 15% but not more than 20% of the post-IPO share capital of the SPAC, and is also required to hold an aggregate subscription of at least 2.5% of the issue size or USD 10 million, whichever is lower, prior to, or simultaneous to the IPO. It may be noted that the shareholding of the sponsors, promoters, promoter groups, controlling shareholders, directors and key managerial personnel of the SPAC in the resulting issuer is locked up for a period of one year from the date of closing of the business combination. Further, a sponsor cannot transfer or sell any of their securities prior to the completion of a business combination.

The entire proceeds of the IPO are required to be kept in an interest-bearing escrow account controlled by an independent custodian until consummation of the SPAC’s Business Combination, and such funds can only be invested only in short-term investment grade liquid instruments (which are required to be disclosed in the offer documents). The interest and other income derived from the amount placed in the escrow account may be withdrawn for the purpose of payment of taxes, and general working capital expenses, subject to prior approval of majority of the shareholders (other than sponsors).

The Business Combination is required to be completed by the SPAC within 36 months from the date of listing on the IFSC Stock Exchanges, and requires a prior approval from majority of shareholders (other than sponsors). Further, the SPAC is required to ensure that the businesses acquisition shall have an aggregate fair market value equal to at least 80% of the aggregate amount deposited in the escrow account with certain exclusions prescribed.

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