Regulations hinder SPACs in India

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Special Purpose Acquisition Companies (SPACs) are considered controversial entities – also known as blank cheque companies – that offer private businesses a fast-track procedure to go public, bypassing the traditional IPO process. It’s an investment vehicle that goes public without any real business.

Although IPOs are very well structured, in the past few years some global markets have introduced SPACs as an alternative. According to Bloomberg, more than 40% of 2020’s IPOs by volume were SPACs, raising US$31.6 billion – more than double the previous year’s volume.

How SPACs work

SPACs are public shell companies that exist for a single purpose, i.e., finding a private company and taking it to the market quickly. In order to take a company public, the SPAC will merge with it, and the company then gets a spot on the exchange. The SPAC transforms into the target company, taking on its name. Once the deal closes, the investors who own shares in the SPAC now own a piece in the new entity.

A SPAC, upon collection of the capital, has only 24 months to find a target company. In case of failure to find a target in the stipulated time, the SPAC faces liquidation and the invested money of the shareholders is returned.

SPACs are primarily owned by veteran corporate leaders and big investors, like private equity firms, while a small number of shares are available to the public. So, a SPAC ideally gives you an opportunity to invest in a company that has a good management team, or a good entrepreneur, that creates high chances of making a profitable deal that would, in turn, increase the value of the investment.

While going public, SPACs offer a different approach than traditional IPOs. In an IPO, private companies work with underwriters or investment banks to work out a deal, and take the company public. This process takes a long time compared to a SPAC listing.

The main advantage of going public through a SPAC is that there is more certainty of execution, i.e., through this process the companies usually get the deal done, while IPOs get derailed at the last minute most of the time.

Does India need SPACs?

The Indian economy needs thousands of companies to go public, and for this purpose we should design the capital market in such a way that they understand why they should be buying future growth, and research and development, over current cash flows.

It is the greed and obsession over the cash flow that has resulted in the private equity boom, debt boom, and the unwillingness of entrepreneurs to go public, and has also caused unnecessary volatility in the equity market.

This IPO 2.0 platform – i.e., SPACs – can pioneer a way so that the top management of the target companies should be better understood in the public market, so they can get long-term support, and can go public via this lightweight process compared to IPOs in terms of days, money, documentation and other formalities.

RBI’s regulatory wall

Currently, a number of unicorn promoters are seeking the path of SPACs for a Nasdaq listing. But in India, the SPAC transaction, also known as the de-SPACing transaction, would involve a cross-border merger, i.e., a merger involving a foreign entity – i.e., the SPAC – thus facing the Reserve Bank of India (RBI) limit of US$250,000 on outward remittances governed by the liberalised remittance scheme, which would become an obvious hindrance to the process.

Blank cheque companies are very well within the legal framework, but the only concern is these entities require strict compliance to a number of regulations that would make their legal future difficult in India. One of the major reasons for the boom of these entities is that they provide a relatively cheaper process compared to the traditional IPOs, but in India cross-border mergers require a lot of money in terms of taxes and other formalities, which completely defeats the purpose of the process.

So, in order to give room to de-SPACing transactions in India, the legislators and the RBI should form a SPAC regime to tackle all the existing gaps in the financial and legal systems. The introduction of SPACS in the Indian capital market would ultimately result in the uplifting of the Indian economy.

Rohit Dhingra
University of Petroleum and Energy Studies

Dehradun