Charandeep KaurPartner

Shringarika PriyadarshiniCounsel

Dushyant SarnaAssociate

• Introduction

  While arguably having been around for almost three centuries since the incorporation of the South Sea Company in England in 1711, blank check companies (more popularly known as SPACs) have caught the fancy of the financial world since the advent of the Covid-19 pandemic. In 2021, more than USD 160 billion was raised through SPAC listings in the United States of America. Put simply, a SPAC is a shell company (an entity with no commercial operations) set up with the objective of raising capital through a public offer and thereafter undertaking a business combination with an unlisted operating company to enable the listing of the shares of the unlisted company within a defined time period and in accordance with applicable law.

  It is commonly perceived (although debatably), that SPACs offer greater price certainty, deal certainty and speed than regular initial public offerings and also the ability for sellers to offshore their holdings and exit through listing.

  India currently does not have a robust regime for listing of SPACs. This has led to Indian entities opting for business combinations with SPACs listed in foreign jurisdictions.

• Key Features

  Some of the key aspects of a SPAC are as follows:

  • Management of SPAC: A SPAC is organised and managed by a sponsor, who is typically a sophisticated investor and commercial operator with certain acquisition targets. The key terms of the SPAC transaction are required to be set out in the offer documents issued for the public offer.
  • Trust Account: As a matter of practice, and to comply with jurisdictional regulations, the proceeds from the public offer of the SPAC are held in a trust account. Usage of the funds lying in this trust account is also specified as part of the offer document of the SPAC and is subject to permissible debits as per applicable law.
  • Time period for target acquisition: A SPAC is required to consummate the combination with an unlisted company (a de-SPAC Transaction) within a specified time from the date of the public issue of its shares (as set out in the offer document). If a de-SPAC transaction cannot be completed within the specified time frame, the SPAC may either seek approval from its shareholders for an extension of the time or the SPAC may dissolve and liquidate its assets and return the amount invested in the SPAC to its shareholders.
  • Process of target acquisition: At the time of raising capital through public offer, the SPAC does not identify the specific target that will be acquired by the SPAC but sets out the key sectors or financial conditions of the target that the SPAC may be looking to acquire in the offer document. Once the target is identified, approval of the majority shareholders (including public shareholders and institutional investors) of the SPAC is sought for the combination with the identified target. The dissenting shareholders also have the right to redeem their shares (or warrants) at investment value if they do not wish to proceed with the combination.
  • PIPE transactions: SPACs often raise additional funds from private investors in the form of private investment in public equity (PIPE) transactions to reduce the financial impact of redemptions by dissenting shareholders prior to the de-SPAC transaction, meet any fund shortfall faced by the SPAC or for any future funding needs of the SPAC. Such PIPE transactions are undertaken after identification of the unlisted target and prior to the business combination with the unlisted target.

• Indian Companies and Foreign SPACs

  India currently does not have a robust regime for listing of SPACs. This has led to Indian entities opting for business combinations with SPACs listed in foreign jurisdictions. Some viable legal structures for such combinations are:

  • Outbound merger with a foreign listed SPAC: An Indian entity may combine with a SPAC listed in a foreign jurisdiction (where the resultant entity is a foreign company) and would, for this purpose, be required to comply with the Companies Act, 2013 and the Foreign Exchange Management (Cross Border Merger) Regulations, 2018 (Cross Border Regulations). Such a merger would be classified as an outbound merger in India, and would be a court-driven process and also require an approval from the National Company Law Tribunal. As part of the process, representations from various relevant regulatory authorities such as Registrar of Companies and the tax authorities would also be sought. Evidently, this procedure is significantly time-consuming (thereby nullifying the biggest advantage of SPACs - speedy listing) and impacts deal certainty.
    
    Additionally, the Cross Border Regulations provide that upon the completion of the outbound merger, the office of the Indian company may be treated as a ‘branch office’ and can only undertake transactions permitted for a branch office under the relevant Indian exchange control regulations (which is a limited set of activities and transactions).
  • Share swap with a foreign listed SPAC: A share swap can be undertaken in a manner where the shareholders of the Indian company agree to transfer their shareholding in the Indian company to the foreign listed SPAC, in consideration of the issuance of shares by the foreign listed SPAC. While for non-resident investors of the Indian company, this share swap structure may be considered under the automatic route (i.e. not requiring specific approval of the Reserve Bank of India (RBI) under Indian exchange control regulations), for the investors resident in India, the automatic route is not available and they would require a specific approval from the RBI.

  While the American legal framework specifically provides for and regulates blank check companies, the existence of these corporeal entities in India may not be possible due to various restrictions under Indian law (including securities regulations, corporate law, and Indian exchange control regulations).

  A key aspect of any structure would involve the acquisition of shares of a foreign company by resident shareholders of the Indian company. Under the Foreign Exchange Management (Overseas Investment) Rules, 2022 (OI Rules): (a) an Indian entity can invest in a foreign entity (engaged in financial services) subject to specified conditions (such as net-worth requirements and posting net profits during the preceding three financial years, as applicable); and (b) a resident individual is restricted from acquiring the shares of a listed foreign company engaged in financial services, in excess of 10% or more of the share capital of the listed foreign entity or if the investment involves gaining control of the listed foreign company.

  Under the OI Rules, a foreign entity is considered to be engaged in financial services, if it undertakes any activity which, if carried out in India, would be regulated by a financial sector regulator. In India, activities of a holding company are regulated by the RBI (which is a financial sector regulator), and accordingly, a foreign listed SPAC, (being a holding company) may be viewed as a financial services entity. To this extent, an Indian entity (who is a shareholder of the Indian company combining with the foreign listed SPAC) would be required to ensure compliance with the OI Rules and a resident individual (who is a shareholder of the Indian company combining with the foreign listed SPAC) may be permitted to only acquire up to 10% of the paid-up equity capital of the SPAC (while also ensuring that there is no arrangement or covenant which may be construed to attribute any form of management control of the SPAC to the individual).

• Regulatory hurdles to the listing of SPACs in India

  In India, there has been a recent spike in public interest in SPACs with an Indian company raising more than USD 1 billion by combining with a US listed SPAC. While the American legal framework specifically provides for and regulates blank check companies, the existence of these corporeal entities in India may not be possible due to various restrictions under Indian law (including securities regulations, corporate law, and Indian exchange control regulations). While a SPAC under the American legal framework may not have any business operations for a period of 18-24 months till it combines with an operating entity, under the Indian company law, a company registered in India, which does not commence business within one year of incorporation can be struck off from the register of companies maintained by the Registrar of Companies. Further, under Indian securities regulations, certain eligibility conditions are prescribed for public offers, which include requirements relating to minimum net-worth, operating profits and net tangible assets (for the previous financial years). This is in contrast to a SPAC which does not have any operations or assets till the completion of the de-SPAC transaction.

  However, the Indian legal regime is alive to the changing financial landscape and the need to keep pace with global financial innovation. In 2021, the International Financial Services Centre Authority has published (for public comments) a draft of the International Financial Services Centres Authority (Issuance and Listing of Securities) Regulations, 2021 (Regulations) prescribing a procedure for listing of securities issued by a company without business operations, and the ensuing merger with an existing company, much akin to the regulatory framework under the American law.

  While public listing of SPACs in India may not be presently permissible in view of the regulatory framework, there are promising reforms on the horizon to facilitate the domestic listing of SPACs.

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