Special Purpose Acquisition Companies (SPAC): Applicability in the Indian Legal Framework

By | March 13, 2021
Special Purpose Acquisition Companies (SPAC)

I. Introduction

Special Purpose Acquisition Companies (SPACs) have arisen as a potential alternative to collect public funds from offshore markets. They are ideally tailored to start-ups, who otherwise find it difficult to excite conservative Indian retail investors. SPAC is a shell corporation with no operational activities and is managed by an established management team (with skills in a certain segment or sector) or by a sponsor.

The primary goal of the SPAC is to collect money through the IPO (initial public offering) to buy a private company at a later date and then to make it public without going through the conventional IPO path. These corporations own and control little but the funds they collect, and when they have an IPO, they do not even have to recognize the ultimate acquisition goal. As a result, SPACs are often referred to as “blank cheque firms.”

II. SPAC as an Alternative to Traditional IPO’s

Traditional IPO’s are seen to be expensive and far more time-consuming in terms of registrations, disclosures, and processes. SPACs involve lesser parties, lesser negotiations and are perceived to offer a faster and flexible route for venture capital funds and private equity majors to take their private companies public.

SPACs are therefore cheaply priced and thus open to the market of mainstream retail buyers. More frequently than not, they choose the newest, most unique, futuristic companies in technology and market space as acquisition targets and are believed to be popular with affluent, smart, new-age investors[1].

SPAC holders typically do not know how their contributions will be spent or what their final target will be. And their money will remain trapped and lay idle for as much as two years. But there’s a complexity element for sure, and thus it’s important to first filter a strong management team as the gamble is on this team’s talent set to spot an appropriate goal with high growth potential.

III. Working of SPAC: General Understanding

A few business experts or experienced businessmen (very commonly a combination of both) come together to form a shell corporation and usually go to the market with an IPO to raise capital for potential purchases. As the only information available to the investor at the time of the transaction is the track record of the “founding partners”. And the acquisition theme (a very vague understanding of what kind of firms they want to buy, which could be geography-specific, industry-specific, a mix of both), the decision to invest shows a lot of confidence in the founders, very analogous to the problem of a blank check; thus the name of a blank check company.

When the IPO is released, the executive committee of the SPAC employs an investment bank to handle the IPO. The investment bank and the management committee of the corporation settle on a fee to be paid for the operation, normally around 10% of IPO revenues.[2]

The SPAC prospectus relies primarily on advertisers, and less on business records and sales since the SPAC lacks a history of success or income. Both IPO revenues are kept in a trust account until a private entity is selected as an acquisition candidate.

The management of the SPAC is normally given 24 months to find and complete a merger with the goal as set out in the plans.[3] If the SPAC is unable to find the goal to finish the merger within the timeframe, it will begin the liquidation process and the money held with the trust will be refunded directly to the invest, along with the interest on that minus any costs, such as taxes, etc.

IV. Regulatory Regimes for SPAC in India

Provisions in Companies Act 2013, in Contraction

Since November 2016, when the government announced demonetization, suspicious shell companies have been cracked and there has been an urgent need to define them because they are not currently defined under the Companies Act.

A Parliamentary Committee urged the Government to describe the word “shell corporation” in the Company Act in order to “avoid legal uncertainty and discourage avoidable prosecutions. Unfortunately, the SPACs have no company objectives of their own and their only goal is to achieve a target.

The Corporation Act 2013 repealed the “Other Objects” provision, thus eliminating all flexibility in the description of the Objects. The Businesses (Amendment) Ordinance passed in Parliament in 2017 recommended the abolition of the all-together “Objects” provision. However, this idea has been removed. Since the “objects Clause” is required and SPAC’s do not carry an objective clause it might contradict the regulatory framework in India.

Pursuant to Section 248 of the Companies ’ Act 2013[4], the Registrar can delete the name of a company from the company register if it has “failed to enter into business within one year of its incorporation.” The average timeline of purchase of the SPAC is 18 to 24 months. This provision thus poses a significant challenge to the application of the SPAC.

SEBI Rules

SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 (amended in August 2017), Section 26 sets out basic eligibility requirements for a public offering. These involve the issuer to:

  • The total tangible asset of at least INR 3 crore for each of the previous three years (earlier condition of not more than 50 per cent to be kept in monetary assets has been removed in the event that the whole public offering does not exist).
  • Minimum consolidated pre-tax operating profit of INR 15 crore for every three of the last five years.
  • The net value of at least INR 1 crore in each of the last three years.

In 2017, SEBI suspended trade in 331 alleged shell firms, but later gave most of them clean chits[5]. In 2018, SEBI based its concept of shell firms in government advisory capacity on the U.S. SEC regulations. It is clear to see that SPACs cannot fulfil all of these requirements. They may not have any operating earnings or non-monetary tangible assets.

Stock Exchange Requirements

The National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE) are India’s two main stock exchanges. Both exchanges require compliance with the SEBI rules. In addition, the NSE expects businesses to have healthy operating cash accruals (Earnings before Depreciation and Tax) for the last two years, rendering SPACs ineligible for listing.

SEBI (Substantial Purchase of Shares and Takeovers) Regulations, 2011 (amended March 2017) and Foreign Exchange Management (Acquisition and Sale of Immovable Property in India) Regulations, 2018 (FEMR) as having a major effect on SPAC mergers in India.

 The FEMR Guidelines encourage overseas investment only upon approval of the proposal by the Reserve Bank of India (RBI). FEMR Cross Border Regulation 2018 requires both inbound and outbound mergers, subject to compliance with all existing laws and regulations.

Examples of SPAC Acquisition in India

SPAC systems are not new to India and, in the past, there have been a number of examples of Indian-focused SPAC institutions such as Trans-India Acquisition, Constellation Alpha Capital, Phoenix India Acquisition,[6], etc. However, their performance has been minimal. In 2015, Silver Eagle Acquisition, SPAC, purchased 30 per cent of Videocon d2h’s share of approximately USD 200 million.

V. Conclusion

From the point of view of the Indian aim and that of its owners, although it may prove to be a challenge to execute a standard De-SPAC transaction, it is possible to customize one appropriate to be conducted in line with the Indian regulatory framework with the requisite approvals. Any of the existing laws and regulations are harmful to the growth of SPACs in India. Any of them are archaic and need to be redesigned with a fresh look at the condition of the Indian economy. Shell companies need to be identified and views of this being mainly a money-laundering mechanism need to be modified.

Once the acquisition is concluded, the SPAC will be governed by the usual provisions. Similarly, separate provisions/chapters are required in accordance with all relevant legislation and listing criteria. Income Tax Legislation can also include SPACs under the exemptions and deductions now open exclusively to Start-Ups, VCs, and angel investors.


[1] Ashwin Mohan, The SPAC craze: What’s the big deal anyway?, Money Control, Feb 17, 2021

[2] Special Purpose Company, Corporate Finance Institute, Available Here

[3] Should India embrace SPAC, the new alternative to IPO around the world? Economic Times, Available Here

[4] Section 248, Companies Act,2013– Power of Registrar to remove names from register of Companies.

[5] SEBI Gives Clean Chit to Most Suspected Shell Companies, The Wire, Available Here

[6] Akhila Agarwal, Yash. J. Ashar, Using SPAC Vehicles as a Means of Listing Outside India, India Corporate Law.

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Author: Eshanee Bhattacharya

Eshanee is practicing in the areas of Corporate Commercial, Insolvency and Securities Law. She is an alumnus of the National Institute of Securities Markets. (MNLU Mumbai)

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