Authored by Anuroop Omkar, Partner & Amit Bikram Panda, Associate
Special Purpose Acquisition Company (“SPACs”) is a publicly traded entity created for the sole purpose of acquiring or merging with an existing entity. SPACs, also known as “blank check companies”,[1] are essentially shell companies that have no underlying business and raise capital through an initial public offering (“IPO”) for the purpose of acquiring an unidentified target company. SPACs, which are publicly listed, generally target a private company which helps the target entity to go public without going through the laborious process of an IPO. The money raised by SPAC, by way of an IPO, is held in a trust until either the target company is acquired or the determined period (generally 19 months to 24 months) for the SPAC elapses.[2] In the latter, the SPAC returns the money to the investors after deduction of certain fees. In the event the SPAC needs to raise any additional capital, it normally does so by way of Public Investment in Private Equity (“PIPE Investment”)[3] after the identification of the target company or during the time of combined valuation of the target company and the SPAC. The sponsors or management team of SPACs try to find a target company with immense potential as the sponsors purchase equity shares of the SPAC at a nominal value as compared to investors purchasing through an IPO and these equity shares in SPACs are converted into shares in the target company after a successful merger.
The concept of SPAC has been around for quite some time now but they have recently risen to prominence, predominantly because of the Covid-19 pandemic. They provide an easier and much less cumbersome process for a company to be listed as compared to the IPO route as the former involves fewer parties and is a flexible way for private equity investors and venture capital funds.
Several Indian companies have used SPACs to be listed on share markets of foreign jurisdictions. For example, the recent listing of ReNew Power on NASDAQ through a SPAC. Although SPACs are getting increasingly popular, the Indian regulatory regime is yet to catch on to the trend. From a securities law perspective, certain eligibility criteria laid down by the Securities and Exchange Board of India (“SEBI”) for listing, such as an operating profit of INR 15 crores,[4] net tangible assets for INR 3 crore[5] and net worth of INR 1 crore for the last 3 years[6], makes an IPO for a SPAC a much less lucrative option.
As a result of these regulatory hurdles, the listing of ReNew Power on NASDAQ through a SPAC was done by way of a reverse triangular merger[7]. First, the existing equity shareholders of Renew Power, the Indian Company, were given, in exchange, equity shares of ReNew Energy Global, a London based company. Secondly, a wholly owned subsidiary of ReNew Global merged with a SPAC listed on NASDAQ. Lastly, ReNew Global was listed on NASDAQ under a new name.
The Indian transaction space is slowly but steadily evolving. Very recently, SEBI has instituted a committee of experts to check the feasibility of drawing a regulatory framework for SPACs in India. Leading the way is the International Financial Services Centres Authority (“IFSCA”), which recently has brought in a regulatory framework for SPACs by way of IFSCA (Issuance and Allotment of Listing) Regulations, 2021.[8] However, if the Indian Government wants to sail the ship of SPACs, it will have to make some major regulatory overhauls in order to ease the regulatory framework and make it lucrative and worthwhile for cash strapped Indian companies to get access to capital by listing on foreign capital markets.
[1] What are Special Purpose Acquisition Companies, can be accessed at https://corporatefinanceinstitute.com/resources/knowledge/strategy/special-purpose-acquisition-company-spac/ (last visited on March 09, 2022) [2] How do Special Purpose Acquisition Companies work (SPACs) work, can be accessed at https://www.pwc.com/us/en/services/trust-solutions/accounting-advisory/spac-merger.html (last visited on March 09, 2022) [3]A primer on SPACs, can be accessed at https://www2.deloitte.com/us/en/pages/audit/articles/spac-risks-trends.html (last visited on March 09, 2022)
[4] Regulation 6(1)(b), SEBI (Issues of Capital and Disclosure Requirements) Regulation, 2018 [5] Regulation 6(1)(a), SEBI (Issues of Capital and Disclosure Requirements) Regulation, 2018 [6] Regulation 6(1)(c), SEBI (Issues of Capital and Disclosure Requirements) Regulation, 2018 [7] ReNew Power merger with blank-check company RMG II gets CCI nod, The Business Standard, June 08, 2021, can be accessed at https://www.business-standard.com/article/companies/renew-power-merger-with-blank-check-company-rmg-ii-gets-cci-nod-121060801452_1.html (last visited on March 09, 2022) [8]Floodgates open for primary market issuances in GIFT City, The Hindu, July 21, 2021, can be accessed at https://www.thehindubusinessline.com/news/floodgates-open-for-primary-market-issuances-in-gift-city/article35447323.ece (last visited on March 09, 2022)