SPECIAL PURPOSE ACQUISITION COMPANIES: LEGAL PROSPECTS IN INDIAN SCENARIO (By-Dr. Padma Singh)

Dr. Padma Singh

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SPECIAL PURPOSE ACQUISITION COMPANIES: LEGAL PROSPECTS IN INDIAN SCENARIO

Authored By-Dr. Padma Singh*

Abstract

With the increasing popularity of SPAC as a means to generate funds which will in return be used in the mergers and acquisitions, it is of necessity that a proper regulatory framework is drawn by the market regulators ranging from securities market, to foreign investment to tax implications as well. even with the new-found popularity, the SPACs may not be a safe and effective mode of investment for the company and for the investors. The current regulatory framework in India does not support the SPACs and proper legislative changes need to be made to protect the investors. This research paper focuses on some very important questions like whether companies like SPACs are recognized and functional under the Indian regulatory framework? whether the investors are truly protected by investing in SPACs or are SPACs just a form of sham companies and whether the SPACs be implemented and governed the same way in India as in other countries? The entire analysis revolves around the legal prospects of SPACs in Indian scenario.

Key words: Special Purpose Acquisition Companies (SPACs), Initial Public Offering (IPO), Securities and Exchange Commission (SEC), Securities and Exchange Board of India (SEBI).

* Assistant Professor in Business Law at National Law Institute University, Bhopal

Introduction

Special Purpose Acquisition companies (SPACs), also called "blank check corporations," execute an IPO of shares and warrants to obtain capital, then use that capital to merge, acquire, or combine with another company or firm. Blank organizations is another name for them due to the fact that these businesses don't have any assets or employees of their own, and they don't even carry out any specific business operations; rather, they are only established for the purpose of completing an acquisition or merger between two or more companies. Recently these organizations have gained popularity and have also been popularized in countries like US, UK, Canada, Singapore and Malaysia. A SPAC IPO differs from a traditional IPO, where the SPAC IPO is released to raise capital for using the proceeds towards acquiring one or more target companies that will be identified after the funds are raised and in case the shareholders are not willing to be involved in the resultant acquisition, then the raised amount will be returned to the withdrawing shareholders.

According to the opinion of Usha Rodrigues, a professor at the School of Law at the University of Georgia, the history of SPACs might be characterised as "sort of shady origin story."[1] SPACs are direct "descendants" of the notoriously corrupt blank check businesses of the 1980s, or the "current form" of those businesses. "a development stage company that has no stated business plan or purpose or has indicated that its business plan is to combine or acquire with an unidentified company or companies, other entity, or person," is how the Securities and Exchange Commission (SEC) defines a "blank check company." To put it another way, the blank check company will conduct an initial public offering (IPO) in order to raise capital for the purpose of purchasing the market.

Shell corporations utilise SPACs to buy or merge with private companies. When a public SPAC merges with or acquires a private firm, the target corporation becomes public while continuing to function months to a year after the SPAC's IPO (IPO). "Reverse merger" describes this business deal.^{^[2]}

The reason behind the new found popularity of the SPACs a form of alternate form of fund raising is that less time and effort and regulatory complexities and documentations that are present in traditional IPOs. And also SPACs enable a large pool of investors (both domestic

and foreign) which in turn leads to market development as well. Presently there are no SPACs listed on the Indian stock exchanges, but many US SPACs have went on to acquire Indian Companies particularly start ups and have made the public in the US market. The importance of having a regulatory framework particularly in India is that with the increasing SPACs being set up and listed on NASDAQ and other countries’ Stock exchanges, the current legislative set up in India does not support the SPACs as institutions for the reason is that in essentiality they are sham companies and also presently for the protection of the investors, investments from SPACs have been barred. And not only the investment in the Indian Companies by the SPACs established in the foreign countries but also purchase of shares by Indian investors in the SPACs established in foreign countries. The legislations also need to ensure that novice investors are protected by the regulations as well.

Emergence Of Spacs:

SPACs, also called blank-check firms, are regulated by the market regulator, which protects investors. SPACs resemble blank-check corporations. As a shell firm, they don't do business or make money. They're created to acquire or merge with another company. Because they're sold on exchanges, "private equity-style" investments provide investors more liquidity. These investments are structured like private equity, which provides this benefit.

SPACs were created in 1992 in response to SEC Rule 419. This law allows investors to reconsider their involvement in blank check deals after learning more about the firm and acquisition target. SEC guidelines discourage blank-check corporations by making such transactions "so restrictive that no one would consider it a viable technique of acquiring cash." The SPAC was created to keep investing in blank check IPOs easy without the terrible reputation of the 1980s or Rule 419. Rule 419 exempted SPACs from various requirements when the SEC created them. SPACs strengthened investor protection and were not meant for fraudulent reasons, hence the SEC supported their development. SPACs' overall structure followed several of Rule 419's principles. ^{^[3]}.

The middle to late 1990s saw a drop in the use of SPACs as corporations found it simpler to obtain capital through initial public offerings (IPOs). Early 2000s saw the rise of SPACs. In reality, SPACs raised about $31 billion in the US market from 2003 to 2014. During the financial crisis, SPACs were a popular investment vehicle, accounting for more than a third of

all IPO volume in the United States in 2007.^{^[4]}

Growing Popularity Of Spacs

Recent reports indicate 700 SPAC IPOs (since 2015). 2020 saw 250 SPAC IPOs. During first three months of 2021, over 300 SPAC IPOs were reported, showing an increasing trend (as against less than 20 SPAC IPOs in the first three months of 2020). SPACs raised a record US$83 billion in 2020 (nearly double the previous five-year total) and US$95 billion in the first three months of 2021 (compared to little over US$ 5 billion in 2020).^{^[5]}

SPACs started in the US 20 years ago, but their popularity has lately surged due to the credibility of sponsors, the growth potential of target enterprises, the time and process involved in traditional IPOs, and the influence of COVID-19 on the international economy. Also, considering that SPACs have recently raised significant money and that a major amount of these assets remains to be spent in targets around the world (with a concentration on emerging economies), many SPAC deals are likely to be completed in the near future.

Meaning of SPACs

SPACs are essentially an empty investment. Take the example of old gold schemes that were prevalent in India, where one pays a certain amount of money to the jewelers and after a year or so after regular payments, gold equivalent to that amount given to jewelers will be given to the customer. A SPAC is similar to it, in terms of benefits being given after a period of time of buying the shares or warrants in an IPO for a price and the amount raised is used for the purposes of merger or acquisition of any combination between two business entities. SPACs have evolved from the previously established blank check companies. These entities were also called as “blank check companies” or “opaque companies” for the reason that in the early 1990s when unregulated and mostly shell companies engaged in fraudulent activities and were substantially poor in their market performance. A resurgence of the SPACs started in mid 2000s with stringent regulations by the SEC. A proper definition of SPACs as a mode of raising capital can be, “Special Purpose Acquisition Companies (SPACs) are publicly traded pools of capital that have been raised for the sole purpose of merging with an operating

company.”^{^[6]} They're called "blind investments" since investors don't know the company. SPACs began as blank check companies in the 1980s. As discussed above the Securities and Exchange Commission classifies firms that issue blank checks as development-stage enterprises that do not conduct any business.^{^[7]} Penny stocks were fraudulently exchanged using blank checks. Penny stocks weren't approved for trading on the NYSE. Markets were manipulated and many innocent investors were duped.^{^[8]}The Securities Enforcement Remedies and Penny Stock Reform Act of 1990 followed.^{^[9]}

A typical SPAC works the following way: there are sponsor, who are experts in a particular industry or a particular geographical area. These sponsors release an IPO for the investors to buy the shares. The investors amount, typically 85% of the total proceeds are then held in a trust.[10]. The merger or acquisition process has to be finished within 24 months of the IPO. If the milestones are not completed the amount raised will be distributed back to the investors.

Figure 1 Working of SPAC

De-SPACing is the most crucial stage where the closed company is opened to the public, essentially. This takes place after the target is identified and the agreement takes place. The investors purchase units “representing one or more shares of common stock and one or more warrants exercisable for one share of common stock at a discount to the offering price.[11]” The SPAC has to finish the acquisition and this merger or acquisition has to be approved by the investors by way of voting and if any has disapproved the investment, the SPAC has to liquidate and return the raised amount to the investors and the share warrants and founder shares and warrants will expire. Post the de-SPACing process, if succeeded, the company can now operate as a publically listed company.

SPAC As A Lucrative Investment Tool

When seen from the standpoint of the company that will be the target of the merger or acquisition, a SPAC presents an intriguing opportunity to generate capital and become a publicly traded corporation. The resultant merger or acquisition will also bring in the expertise of the management team, i.e. the sponsors. It will be a matter of convenience for the target companies. In a way, SPAC is advantageous for also furthering the start up culture currently going on in India.

As for the management team, i.e. the sponsors are concerned, the returns in terms of the fees payable makes SPAC a good vehicle for them. The management team is paid from the trust amount of the investors while searching for a target company. The sponsors will acquire between 20 and 25 percent of the SPAC through a combination of shares and warrants, and between 7 and 7.5 percent of the estimated funds from the IPO will be obtained through private placement.[12]This serves as an incentive for them as well.

Investors now have access to private equity investments, which were previously only available to institutional investors like hedge funds and investment corporations through the use of SPACs. Second, when compared to private equity investments, SPACs are more transparent when it comes to financial reporting and voting rights for shareholders. Third, SPACs restrict the downside for investors holding IPO funds in trust and returning the amount if the purchase is not done in 18-24 months. But all these supposed advantages can also be taken as disadvantages if looked at from other perspective. The SPACs provide an advantage to

underwriters and venture capitalists in the form of fees as compared to traditional IPOs[13].

Are Spacs Really Investor Friendly?

Private equity funds don't allow investors to sell their assets at any time, whereas SPACs do. Private equity executives receive 20% of the fund's income as management fees. SPAC management fees are 20% of any acquisition's capital worth. The fact that investors in SPACs do not have voting authority over the companies that private equity managers invest in is the best feature of these vehicles.[14] So in case where the size of the acquisition is small, the amount of fees to payable is also less.

There are three basic ways to engage in a SPAC offering, each of which is based on the amount of money invested. The first is a Sponsor Group, which consists of experienced investors with experience buying and operating businesses who are sponsoring the SPAC offering. Because investors can withdraw their money after the agreement is announced, these sponsors normally take on more risk. They do, however, have the potential to generate extremely substantial returns. The SPAC IPO is the next investment mode, which is the subject of this study. Retail investors can invest in SPAC IPOs like Robinhood at this level. After determining a potential merger target, sponsors will use a method known as private investment in public equity (PIPE) to raise capital. PIPEs serve as an insurance policy for the initial public offering (IPO) capital of institutional investors.^{^[15]}

The SPAC basically depend on the technical know how of the sponsors, who are under serious time pressure for completing a merger or acquisition within eighteen month, which may prompt them to forgo certain due diligences. It was observed that many SPACs fail because they fail to find a target firm for acquiring and this leads to their dilution. While the positive factors of SPAC are well noted, but do advantages also ensure a sure success of the public firm resultant of SPAC.

Investors not only remain vulnerable to the market conditions but also to the insiders of the company as well, especially the unsophisticated and literate investors who can be misguided by the favorable shareholder in case of voting and might vote in support of transactions promoted

by the management of the SPAC[16]. SPAC are used as an entrant into the market, but does not guarantee the success in the market. SPACs allow even low-quality firms to enter public market or even so the sponsors may identify target firms which have a poor financial profile.[17] And even the most qualified sponsors can not assess the market and success rates well.

Structure of SPACs

As was just mentioned, SPACs are required to comply with Rule 419 of the SEC. After deducting the underwriting fees, the proceeds from the initial public offering (IPO) are required to be transferred into an escrow or trust account in the amount of ninety percent, with the remaining ten percent being utilised to finance the merger or acquisition of the target company. Trust accounts are where SPACs put the majority of their funds. In contrast to Rule 419, SPAC warrants cannot be exercised until after the merger has taken place. SPACs require that the net assets of the target company be at least 80 percent of the SPAC's total assets, and they must allow between two and three years to finish the business combination before dissolving. Shell firms have more time to finish business combinations once they've chosen a target because to the availability of SPACs.^{^[18]}

SPAC IPOs are unit sales with standard prospectuses. Each unit includes one share of business stock and a portion of a warrant to buy more stock later. Average unit cost is $10. After the SPAC's IPO, the units are subdivided so investors can exchange units, shares, or warrants. The sponsor buys all warrants and founder shares at a discount (which represent twenty percent of the post-IPO shares). After a merger, these founder shares are usually sold. The shell company's IPO turned most SPAC assets into cash. Directors of private equity, investing, or venture capital firms sponsor SPACs. The SPAC's IPO is underwritten with a solid commitment, and the underwriter's fee is maintained in a trust account until the merger is finalised. Underwriters may buy more shares. Underwriters invest in the SPAC to merge firms.

Shell businesses in SPACs aren't required to name a target business immediately, exposing investors to risk. SPACs try to decrease these risks by strengthening shareholder protection. The majority of the funds raised through a SPAC initial public offering are placed in trust accounts until the company combination is officially approved. In the event that shareholders reject the merger, they have the option of converting their shares into trust account shares. Unless the SPAC finds a business combination within two years, the public shell firm will be liquidated.^{^[19]}

SPAC Acquisition Target

Before the IPO closes, SPACs can't make purchases. IPO financial statements contain the target company's financial statements and the IPO registration statement. IPO-like. SPAC IPO prospectuses must specify whether they have no target firm. The SPAC can't examine potential targets until after the IPO, even if the market is interested. The SPAC IPO prospectus says private equity sponsors can't target companies previously recognised by the firm.

SEC guidelines require the business combination to spend 80% of the trust account's assets. SPACs want goals two to three times the shell company's size to minimise founder dilution. There's no minimum transaction size, therefore a larger company is preferable. Many SPACs list the target firm's sector and geographic concentration. No regional or industry focus needed.^{^[20]}

SPACs and IPOs

SPACs have several advantages over ordinary IPOs, which has boosted their attractiveness. SPACs' efficient transaction timing is a crucial advantage. SPAC business combinations take 3-4 months from letter of intent to closing, while traditional IPOs might take 6-9 months.

SPACs demand smaller due diligence teams, while IPOs require greater time and analyst/market participant contact. SPACs and IPOs must be SEC-inspected, but SPACs can defer this until the offer closes.^{^[21]}

Despite reduced direct and indirect costs, SPACs are more expensive than IPOs. SPACs are cheaper and give more pricing certainty than IPOs. The SPAC's IPO price is $10 per share and warrant. SPAC merger agreements frequently contain a price or share exchange rate. Before going public, IPOs are priced.^{^[22]}

Traditional IPOs undervalue companies, hurting value. The corporation can negotiate SPAC prices with the sponsor. SPAC IPOs regulate valuation better, reducing under-pricing.

Disadvantages Of Raising Special Purpose Acquisition Companies

Blind investment: The risk is minimised but not eliminated, thus major owners are essentially making a blind investment. The sponsor who planned to form the SPAC firm may find that they are unable to do so, and the funds will be held in reserve for the next two years, when they can be put to greater use.

The Shell notion grey area: SPAC is now seen as an alternative for shell firms; however, this similarity is not commonly accepted in many foreign markets, and this type of business is always associated with suspicion. Companies in the IT industry may not want to deal with this because they already have a lot of regulatory considerations to deal with, such as GDPR, data sharing, and data protection, and adding this to the mix would increase their responsibility.^{^[23]}

Regulatory Framework for SPACs in India

The Companies Act, 2013

Since demonetization in November 2016, the government has controlled Shell. A Parliamentary Committee recommended defining "shell corporation" in 2018 to eliminate legal ambiguity and unnecessary litigation. SPAC deals take 18-24 months. Section 248 of the Companies Act 2013 allows the Registrar of Companies to remove a company's name from the

register if it fails to begin commercial activities within 12 months of incorporation.^{^[24]} The corporation's Management would face a flurry of legal challenges as a result. This problem can be resolved by making amendment in the regulations and the Companies’ Act, 2013 and making an excepting provision for SPACs in the sense that if the Registrar is intimated in advance for the reason of the incorporation, that is creating a SPAC, then the provision of commencement of business within one year would not apply. ^{^[25]}

SEBI Regulations

A SPAC is not even recognised by the Securities and Exchange Board of India Act. To be eligible for public listing, a company must have – “net tangible assets of at least 3 crore rupees in the previous three years, consolidated pre-tax operating profits of at least 15 crore rupees in any three of the previous five years, and net worth of at least 1 crore rupees in each of the previous three years”.^{^[26]}

SPAC can't IPO in India since it lacks operating earnings and net tangible assets. SPAC is popular in the US. SEC regulates SPAC transactions. To maintain transparency and integrity, the SEC has strong SPAC filing, reporting, and disclosure requirements. Due to SPAC's well-regulated status in the U.S., sponsors and investors prefer it to traditional IPOs. Furthermore, each stock exchange has its own SPAC laws.^{^[27]} The Indian legislation currently imposes no significant regulatory constraints on SPACs. However, SEBI has formed a committee of experts to investigate the prospect of enacting SPAC legislation in the country, which might boost the possibilities of start-ups listing domestically.

SPACs in different nations

In US it was witnessed that investment bank and hedge fund market have increasingly invested in SPACs. The banks like Morgan-Stanley, Goldman Sachs, Deutsche Bank etc. were involved in underwriting at least one SPAC in 2006. Apart from US, SPAC became common phenomenon in UK and EU as well. In US[28] there are stringent regulations governing SPACs.

There are many regulatory norms and requirements to be fulfilled by SPACs during the 18-24 months period only.

In EU the structure and approach of SPACs are different and more suitable to Indian security markets. The size of IPOs are larger and sizes of acquisitions are smaller compared to the US SPACs. Secondly the most important feature is that compared to the US SPACs, the EU SPACs are to complete their desired merger or acquisition in shorter time frame. The targ et companies in the SPACs of EU are selected based on factors as observed are country of incorporation, tax benefits and stock exchange regulations. Tax havens are usually the choice of target companies by the founders of the SPACs[29].

From the aspect of returns, the EU SPACs which targeted the smaller sized companies have had greater returns compared to the larger companies.[30] The difference in flexibility can be observed by the fact that the target companies in US need to have “minimal fair value accounting for 80% of the trust mount in order to constitute a qualified business combination and to finish the SPACs investment lifecycle.”[31] Whereas the EU SPACs have no such requirement, enabling the smaller sized multiple acquisitions instead of only one large acquisition or merger. Another advantage that the EU SPACs have is that the target companies can be predetermined by the sponsors. This allows the investors to make an informed decision in the beginning only as to whether they want to invest or not. EU SPACs offer flexibility and more information regarding the companies the investors are going to invest in, better than US SPACs. While Hong Kong is considering SPACs and its implementation[32], Malaysia[33] recently released guidelines regarding SPACs, concentrating only on investors. These guidelines involve a case to case basis for operating SPAC, depending on the team involved, their compensation etc. In Singapore similar guidelines to that of Malaysia can be found.

Regulatory Challenges In India For SPACs

In India there are a few regulatory challenges which delegitimize SPACs. One of them is that of the SPAC takes 18-24 months to find a target company, finish the merger or acquisition and also commence the operations of a fully public company. but in India, according to the Companies Act, 2013, the as per Section 248[34], if a company fails to commence its operations within 12 months of its incorporation, the company’s name will be removed by the Registrar from the register of companies. This can be avoided by an amendment extending the timeframe for commencing the business operations to conform with the working of the SPACs. The recent grip tightened around shell companies in India by the MCA can also work as a repellant for the investors to invest in a shell company which is still in testing stages in other countries as well.

SEBI's rules are causing SPACs compliance issues. Net tangible assets of at least 3 crores rupees in each of the previous three years, minimum average consolidated pre-tax operating profits of 15 crores rupees in any three of the previous five years, and net worth of at least 1 crore in each of the previous three years are required for a typical Indian company to list its securities on a registered stock exchange. This is true for companies registered under the 2013 or 1956 Companies Acts. The problem is caused by the fact that SPACs are currently blank corporations with no business operations.

In the past, it was against the law for Indian companies to be listed on stock markets located outside of India. The issue of depositary receipts like ADRs ( American Depository Receipt) and GDRs Global Depository Reciept) is required before a foreign individual or organisation can invest in Indian companies. However, further changes were made to the Companies Act, 2013, and now, under Section 23, it is permissible for the stocks of Indian companies to be listed on the stock exchanges of other countries, provided that such countries have stringent rules against the laundering of illicit funds.[35] SPAC mergers and acquisitions must comply with the Foreign Exchange Management (Cross Border Merger) Regulations, 2018, and Section 234 of the Companies Act, 2013.[36]

After the NCLT approves the merger, the Indian office of the target firm is treated as a branch office of the combined corporation. Immediately. A resident can buy shares outside India if the overall fair market value doesn't exceed the Liberalized Remittance Scheme restrictions (which

are currently set at USD 250,000 each fiscal year). When de-SPACing occurs, which is the process by which shareholders acquire shares of a company after a merger or acquisition has taken place, this could be one of the restraints that prevents people from India from receiving shares of the merged corporation that is located in another country.

Even from a taxation point of view, the SPACs pose a problem, in the form of higher tax rates. For an individual, if an investment in SPAC is made, the rate of tax is 20%, compared to the 10% in made in Companies listed on domestic stock exchange[37]. This can demotivate the investors from investing in foreign SPACs

The SEBI has only recently constituted a committee to regulate the SPACs market[38]. So it is likely that the SPACs to become fully functional will take time in India. But the International Financial Services Centers Authority Act ("IFSCA"), 2019[39] has brought in SPACs into India but only partially. The IFSCA[40] has brought in SPACs by way of the IFSCA (Issuance and Listing of Securities) Regulations, 2021. In an IFSC Stock exchange, sponsors should have good track record, minimum issue size must be USD 50 million, the minimum number of subscribers should be 50 and minimum subscription received in the issue should be at least 75% of the issue and have upto 36 months for finishing the transactions.

Framework for SPACs by IFSCA

India's two official stock exchanges are NSE and BSE. International Financial Services Centre listing opportunities are often neglected. These centres have had a favourable impact on Indian companies, suggesting a SPAC might be listed on the NSE, BSE, and IFSCA.^{^[41]}

In light of this, it is clear that the need of regulation for SPACs has reached an essential stage at this point. The SEBI recently formed an Expert Group to look into the feasibility of SPACs in India. Additionally, the IFSCA has issued the IFSCA (Issuance and Listing of Securities) Regulations, 2021, which provides a regulatory framework for SPACs. Regulatory authorities all over the world have been working to regulate SPACs. Chapter VI of the IFSCA Regulations, 2021 has laid down the conditions and pre-requisite for listing of a SPAC in

IFSC^{^[42]}. Key elements are –

1. Eligibility Criteria has been set for the sponsors.

2. Certain disclosures have been mandated.

3. The Minimum issue size has been set at USD 50 Million with the holding of the sponsors being between 15-20 percent of the issue.

4. Minimum Application size has been set at USD 1,00,000

5. Minimum Subscription of an issue has been set at 75 percent of the value, with minimum subscribers being 50 and the limit for a single investor at 10 percent.

6. The Upper limit for the Completion of the Acquisition process has been set at 36 months.

Conclusion And Suggestions

Full adoption and functioning of SPACs would require changes to the Companies Act, SEBI Rules Regulations, Income Tax Act and FEMA. A thorough implementation and operation of SPACs is also required. In this environment, it's vital to build a strong legal framework and determine if SPACs are a viable alternative to IPOs. Both issues are linked. In the next section, we'll evaluate SPACs' possible motivations and demotivation in India.^{^[43]}

Other criteria, such as the clarity of applicable rules and regulations and tax repercussions, play a key influence in the decision between going public through an IPO or through a SPAC. The former has a clear set of rules and regulations, giving it an edge over SPACs, which are still developing theirs. This collection of rules and regulations that apply to the former can be found here. It is evident that one could quickly run afoul of the law if there is a lack of clarity on matters pertaining to taxation, disclosures, reporting, and exchange control. This could result in fines and other unfavourable implications. Another element that needs to be taken into consideration is the market segment that the company operates in. When compared to well-established multinational enterprises, start-up companies are typically regarded as the superior investment opportunity by SPACs.

It has also been observed that new age enterprises and start-ups are the ones most likely to favour raising capital through SPACs due to the somewhat less complicated regulatory process involved in doing so.

From the above analysis, it is clear that the SPAC is still a developing mode of investment around the world.US has had experience unlike other countries while developing framework for governing SPACs, with its experience from regulating Penny Stocks. But other countries like Japan, India and Singapore are still in the process of developing the regulatory framework of these SPAC. While investor friendly in terms of the liberty in terms of asking for the invested amount and also the sponsorship of the companies by market experts, this does not guarantee the success of the resultant public company after the de-SPACing. The potential investors of SPAC may not be financially well read to understand the market responses and the potential pitfalls from the merger or acquisition, relying on the know how of some sponsors who may take the wrong decisions as well. while it is established that SPACs benefit investors in terms of voting power and also option to withdraw from the investment, it cannot be denied that it can be too early for some nations like India to introduce SPACs when itself has struggled with stock market scams and still in a way strengthening its market governing laws.

SPAC is a new mode of investment. A mode of funding the companies that enables easy accessibility and less time and regulatory requirements that are present in a traditional IPO, are one of the few factors that make SPAC advantageous and attractive. But looking at the regulations required to make the Indian market suitable for SPAC, keeping in mind the financial literacy of the investors and also from the perspective of the tax regime, the foreign investment guidelines as well as the current regulations against shell companies, needs time and due consideration. Expanding the market and increasing foreign investment is necessary and SPAC serves as an example for legal vision in light of market requirements for an expansive and inclusive growth of both investors and market as well. but as the saying goes “too many cooks spoil the broth”, the same way too many regulations may restrict the scope of the SPACs and also its functioning.

Article Information

SPECIAL PURPOSE ACQUISITION COMPANIES: LEGAL PROSPECTS IN INDIAN SCENARIO (By-Dr. Padma Singh)

Authors: Dr. Padma Singh

Journal IJLRA
ISSN 2582-6433
Published 2022/07/29
Volume 2
Issue 7

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[1] Camila Domonoske, “The spectacular Rise of SPACs: The Backward IPO That Taking Over Wall Street” ( NPR, 29 December 2020) accessed 12 April 2022.

[2] SEC, “What You Need to Know About SPACs – Investor Bulletin”, (Sec.gov.in, 25 May, 2021).

accessed 3 April 2022

[4] Lora Dimitrova. “Perverse Incentives of Special Purpose Acquisition Companies, the Poor Mans Private Equity Funds” (2017). Journal of Accounting and Economics, 63(1), 99-120.

[5] Pranav Sayta, “SPAC and its Growing Relevance in India” (Ernst & Young, 10 May 2021) accessed 16 April 2022

[6] Robert Berger, “SPACs: An Alternative Wav to Access the Public Markets” (2008) Journal of Applied Corporate Finance 68

[7] Office of Investor Education & Advocacy, “Blank Check Company” accessed 1 November 2021 (“The SEC defines a blank check company as “a development stage company that has no specific business plan or purpose or has indicated its business plan is to engage in a merger or acquisition with an unidentified company or companies, other entity, or person”.) “A blank check offering is an initial public offering of a company that has been formed for the purpose of raising money and buying an already existing company.”

[8]THE investors were sold shares at high prices than the actual trading prices and profited from the difference from the actual market price and the mark up price at which the investors were sold.

[10] Lewellen SM, “SPACs as an Asset Class” (2009) SSRN Electronic Journal

[11] Derek K. Heyman, “From Blank Check To SPAC: The Regulator’s Response to The Market, and The Market’s Response to The Regulation” (2007) ENTREPRENEURIAL BUS. L.J. 531

[12] ‘Rise of SPACs: An Indian perspective’ (2021), accessed on 1^st November 2021

[13] Elena Ignatyeva, Christian Rauch and Mark Wahrenburg , ‘Analyzing European SPACs’ (2013) The Journal of Private Equity, Vol. 17, No.. 64-79,

[14] Jenkinson, T., and Sousa, M., “Why SPAC Investors Should Listen to the Market” (2010) working paper, Oxford University.

[15] David Panton‘What is a SPAC and Why are They Suddenly so Popular?’ (Excelsior Capital, 16 October 2020). /> accessed 12 April 2022

[16] Mira Ganor, 'The Case for Non-Binary, Contingent, Shareholder Action' (2021) 23 U Pa J Bus L 390. There is a possibility fo the sophisticated shareholders to exercise their right of redemption of shares in the possibility of the shares. The author suggested Contingent shareholder action, where the vote of the shareholders would be disclosed, which would prompt the shareholders to the make simultaneous actions in response to that.

[17]Johannes Kolb and Tereza Tykvová, “Going Public via Special Purpose Acquisition Companies: Frogs Do Not Turn into Princes” (2016) Journal of Corporate Finance 80. It was found that the companies acquired by way of SPACs severely underperform and also receive less investments by VCs and private equity firms. And also that the firms that SAPCs attract are not financially sound companies, was one of the factors that contribute to the underwhelming long term performance of the SPAC companies

[18] James Murray, “Innovation, Imitation and Regulation in Finance: The Evolution of Special Purpose Acquisition Corporations” (2017) Review of Integrative Business and Economics Research, Vol. 6, No. 2, pp.1-27,

[19] JS Murray, “The Regulation and Pricing of Special Purpose Acquisition Corporation IPOs”, (2018) SSRN Electronic Journal, doi:10.2139/ssrn.1746530

[21] Bridge Point Capital, “SPAC vs Traditional IPO & Reverse Takeover”. (1 April , 2021) accessed on 17 April 2022

[22] Alicia McElhaney, “SPAC Costs Are ‘Far Higher’ Than Previously Realized, Study Finds”(The Institutional Investor, (December 10, 2020), accessed 16 April 2022.

[23] Ayush Patria, “Conundrum in The Development Of Special Purpose Acquisition Companies (SPAC) in The Indian Corporate Sector” (2021) Volume I Issue I, Indian Journal of Corporate Law and Policy.

[24] Karan Upadhyaya, “SPAC Regulations in India: Identifying regulatory challenges and the way forward”, (SSC

ONLINE, 26 June, 2021), accessed 20 April 2022.

[25] Amlegals, “Regulatory Framework for SPAC in India” (AMlegals, 9 April 2021 ), accessed 28 April 2022

[26] Rakesh Nangia and Neha Malhotra, “Regulatory challenges for SPACs in India”, (The Hindu Business Line, 21 March 2021) accessed 26 April 2022

[28] In SPACs the shares are offered at $10 in an offering

[29] The advantages posed by the domestic markets like more knowledge of the domestic market conditions and using their market insights are not the factors observed by the

[30] It was also noticed that the investors who initially invested in the SPACs were only involved for shorter periods of time. And also that the EU companies have usually been the target companies for the US SPACs, which then went on to be traded on NASDAQ and the NSE.

[31] Brandon Schumacher, “A New Development in Private Equity: The Rise and Progression of Special Purpose

Acquisition Companies in Europe and Asia” (2020) 40 NW. J. INT'L L. & BUS. 391 accessed 1 November 2021

[32]Alun John “Hong Kong considering allowing SPAC listings” (2021) Thomson Reuters , accessed on 1^st November 2021

[33] The guidelines also place a minimum cap of RM150 million on fund raising by SPACs through its initial public offering

[35] The Companies Amendment Act, 2020, No 29 of 2020 dated 28 September 2020

[36] s. 234 of Companies Act, 2013. Even permission of NCLT is required under ss. 230 and 232.

[37] ‘Rise of SPACs: An Indian perspective’ (2021), accessed on 1^st Novermber 2021

[38] Business Standard, “Markets regulator Sebi plans to come out with framework for SPACs”, (2021) Press Trust of India, accessed on 1st November 2021

[39] the International Financial Services Centres Authority Act ("IFSCA"), 2019

[40] Aimed at developing and regulating the financial institutions, financial services, and financial products within the International Financial Services Centres

[41] Dhruv Singhal et al, “Role of IFSC in the Indian SPAC Dream: An Overview – Part 3”, (Cyril Amarchand Mangaldas, 3 May 2022) accessed 14 May 2022.

[42] International Financial Services Centres Authority, “Gist of Agenda item: International Financial Services Centres Authority (Issuance and Listing of Securities) Regulations, 2021”, Seventh Authority Meeting held on 30th June, 2021.

[43] Megha Mittal, “SPACs – Value Proposition & Regulatory Framework” (Vinod Kothari Consultants, 17 August 2021 accessed 20 April 2022

SPECIAL PURPOSE ACQUISITION COMPANIES: LEGAL PROSPECTS IN INDIAN SCENARIO (By-Dr. Padma Singh)

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SPAC As A Lucrative Investment Tool

Are Spacs Really Investor Friendly?

SPACs in different nations

Regulatory Challenges In India For SPACs

Conclusion And Suggestions

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SPECIAL PURPOSE ACQUISITION COMPANIES: LEGAL PROSPECTS IN INDIAN SCENARIO (By-Dr. Padma Singh)

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