International Financial Services Centers Authority (“Authority”) in consultations with Securities and Exchange Board of India (“SEBI”), the capital market regulator and watchdog, notified International Financial Services Centers Authority (Issuance and Listing of Securities) Regulations, 2021 (“Regulation”) dated July 16, 2021.
Through this regulation, SEBI also introduced the concept of Special Purpose Acquisition Companies (SPACs) in India allowing SPACs to list directly onto an exchange located in a special financial zone called GIFT City.
In the recent times, we are keeping hearing about the SPAC things. SPACs aren’t really new to the global markets, though they’ve existed since longer period, we are hearing about them more often now because lot of Indian private companies specially start ups, in look for liquidity, are turning their ways to list their securities on foreign jurisdiction more particularly on American markets to bypass the traditional method of Initial public offer (“IPO”) which is tested to be cumbersome, lengthy, time consuming, expensive and more important not suitable for startup ecosystem.
Small and mid-sized companies may want to continue to fund development, invest in brand awareness or make acquisitions to continue growing, but they may not be ideal candidates for traditional IPOs. By merging with a SPAC sponsor, existing companies can retain a stake in their business and gain access to liquidity that otherwise would not be available to them.
In a first deal of an India renewable Company, renewable energy producer ReNew Power Private Limited (“ReNew Power”) announced an agreement to merge with RMG Acquisition Corp II (RMG II), a blank-cheque company. The merger of ReNew Power with RMG Acquisition resulted in the former’s listing on Nasdaq dated August 24, 2021 with enterprise value of $4.8 billion.
The transaction was unanimously approved by RMG II’s Board of Directors and was approved at the extraordinary general meeting of RMG II’s shareholders held on August 16, 2021. As a result of the business combination, RMG II has become a wholly owned subsidiary of ReNew Energy Global.
So, what really are Special Purpose Acquisition Companies or SPACs?
SPACs are also commonly referred to as blank check companies with no specific business plan or purpose. It is a shell corporation formed with a sole purpose to raise funds from the public via IPO and list on a stock exchange(s) with the purpose of acquiring a private company, thus making it public without going through the traditional IPO process. Once acquired by SPAC, a private company becomes a public listed company by avoiding the whole traditional approach of IPO.
Lifespan of SPAC can be understood in three stages approach
- When the SPAC is in its shell company stage,
- SPAC going for initial public offer and
- When the SPAC acquires or merges with an operating company.
The Indian government has been against shell entities, because those entities that have no business activities were used very indiscriminately for tax avoidance, routing money, and money laundering. However, not all shell companies may be money laundering vehicles. There are many shell companies that work within legal limits and do not have financial irregularities.
What entities are eligible under the regulations?
The following entities shall be eligible to list its securities under these regulations on a recognised stock exchange:
(a) A company incorporated in an IFSC;
(b) A company incorporated in India; and
(c) A company incorporated in a Foreign Jurisdiction
Terms used in relation to SPAC
- “Business combination” shall mean merger, amalgamation, share exchange, asset acquisition, share purchase, reorganization or other similar business combination with one or more businesses.
- “Issuer” shall mean a legal entity formed for the purpose of listing on the recognized stock exchange(s).
- “Sponsor” shall mean a person sponsoring the formation of the SPAC and shall include persons holding any specified securities of the SPAC prior to the IPO.
- “Specified securities” means equity shares and convertible securities.
Framework for IPO and listing of SPAC
|Particulars||Initial public offer (Chapter -III)||listing of SPAC (Chapter – VI)|
|Eligibility||1. Commencement of business activity at least 3 years prior to the date of filing of prospectus.
2. Operating revenue of at least USD 20 million in the preceding financial year; or
3. An average pre-tax profit, based on consolidated audited accounts, of at least USD one million during the preceding three financial years; or
4. any other eligibility criteria that may be specified by IFSCA
|1. SPAC shall be eligible to raise capital through IPO only if:
a. the target business combination has not been identified prior to the IPO; and (condition seems to be rigid)
b. The SPAC has the provisions for redemption and liquidation in line with these Regulations.
2. A sponsor of the SPAC issuer shall have a good track record in SPAC transactions or business combinations or fund management or merchant banking activities.
|Lead manager||One or more merchant bankers as lead manager(s) to the issue and shall also appoint other Intermediaries in consultation with the lead manager(s).||Shall mutatis mutandis apply
|Offer for sale||The securities must have been held by the sellers for a period of at least one year prior to the date of filing of the draft offer document.||The question of offer for sale does not arise.|
|Offer document||1. The lead manager shall file a draft offer document along with due diligence certificate.
2. Host on the website of IFSCA, SE and lead manager for minimum 14 days for public comments.
3. IFSCA will issue observation on details of comments received and incorporated by Lead manager within 30 days.
4. Filing of final offer document with Authority and Stock exchanges.
|Shall mutatis mutandis apply
|Offer timing||Within one year from the date of issuance of observations by the Authority.||Within one year from the date of issuance of observations by the Authority.|
|Issue size||Not less than USD 15 million or any other amount as may be specified by Authority.
Facility to make reservation on competitive basis up to 25% of the issue size to Directors, employees, shareholders other than promoters and promoter group.
| 1. not less than USD 50 million or any other amount as may be specified by Authority from time to time.
2. The sponsors shall hold at least 15% and not more than 20% of the post issue paid up capital.
Provided that the sponsors shall also have aggregate subscription (all securities) in terms of amount in the SPAC company prior to or simultaneous to the IPO, amounting to at least 2.5% of the issue size or USD 10 million, whichever is lower.
|Pricing||The issue may be through fixed price or book building mechanism and the price shall be determined in consultation with lead manager. (No valuation method is specified)||The price of the equity shares in the IPO shall not be less than USD 5 per share.
No clarity on fulfillment of additional funding requirement
|Offer period||Offer opens for at least three working days and not more than ten working days.||Offer opens for at least three working days and not more than ten working days.|
|Underwriting||May be underwritten by an underwriter with adequate disclosure in the offer document.
(No specific conditions provided)
| 1. Adequate disclosure shall be made in offer document.
2. At least 50% of the underwriting commission shall be deferred until successful completion of the business combination, and shall be deposited in the escrow account.
3. In case of liquidation, the underwriter shall waive their rights on the deferred commission deposited in the escrow account.
|Minimum subscription||a. at least 75% of the issue size; and
b. Minimum number of subscribers shall be 200 or as may be specified by the Authority.
|a. at least 75% of the issue size; and
b. minimum number of subscribers shall be 50 or as may be specified by the Authority.
|Lock-in period||The pre-issue shareholding of all shareholders of the issuer shall be locked-up for a period of 180 days from the date of allotment.||The shareholding of the sponsors, promoters, promoter groups, controlling shareholders, directors and key managerial personnel of the resulting issuer shall be locked up for a period of one year from the date of closing of the business combination.|
|Application and allotment||On a proportionate basis or discretionary basis and shall be disclosed in the offer document subject to condition that no single application shall be allotted more than 10% of the post issue capital.|| 1. The minimum application size shall be USD 100,000.
2. No single application shall be allotted more than 10% of the post issue capital.
3. Allotment and the payments and refunds are completed within 5 working days from the date of closing of the issue.
|Post issue report||The lead manager(s) shall file a post-issue report with the SEs giving details relating to number, value and percentage of all applications received, allotments made, basis of allotment, subscription, details of credit of specified securities, details relating to payments and refunds, date of filing of listing application, etc. within ten working days from the date of closing the issue.||Shall mutatis mutandis apply
|Green shoe option||An issuer may provide the option inter alia subject to:
1. the draft offer document and offer document shall contain all material disclosures.
2. the issuer has appointed a merchant banker as a stabilising agent.
3. the maximum number of specified securities that may be borrowed in excess of the issue size shall not exceed 15% of the issue size.
|Continuous disclosure requirements||As provided in Chapter XI – Listing Obligations and Disclosure Requirements.||As provided in Chapter XI – Listing Obligations and Disclosure Requirements.|
SPACs specific obligations:
1. The entire proceeds of the IPO are kept in an interest-bearing escrow account controlled by an independent custodian until consummation of the SPAC‘s business combination.
2. The escrow funds shall be invested only in instruments disclosed in the offer document.
3. The interest and other income derived from the amount placed in the escrow account may be withdrawn by the SPAC issuer for the following purposes:
a. Payment of taxes; and
b. General working capital expenses, subject to prior approval by way of special resolution of the shareholders other than sponsors.
4. The SPAC shall seek prior approval by way of majority of shareholders other than sponsors, for the proposed business combination.
5. In the event of change in control of the SPAC, the SPAC issuer shall provide the redemption option to the shareholders (other than sponsors)
6. The SPAC issuer shall complete the business combination within the timeline disclosed in the offer document, not exceeding 36 months from the date of listing.
As per Section 248 of the Companies Act, 2013, the registrar has the power to remove the name of the Company from the register of companies, if it has “failed to commence its business within one year of its incorporation.” What will be the implication on SPACs?
7.If the business combination is not completed within the permitted time frame, the escrow account shall be liquidated and the Sponsor shall not take part in the liquidation distribution.
8. A sponsor shall not transfer or sell any of his specified securities prior to the completion of a business Combination.
9. The SPAC and the sponsors shall ensure that there is no related party transaction or connection of sponsor or any of their associates with the business combination.
The introduction of the concept of SPAC is a welcome move seeing the global market trends and challenges in raising the liquidity in this pandemic period. India Inc., is no longer an exception to adopt this trend and shall make the best use of the scenario. The biggest challenge is of the regulators to provide Indian companies the much needed platform in terms of International standards and ease of doing business. There seems to be a lot of ambiguity at various levels which needs to be address by the regulator, say it the provisions applicable to SPAC in terms of Companies Act, 2013, required changes in FDI norms, and constructive provisions on business combination methods.