I. What is Special about Special Purpose Acquisition Companies?
Special Purpose Acquisition Companies (“SPACs”) have re-emerged as popular investment vehicles, particularly as a response to the capital-raising challenges posed by the COVID-19 pandemic. Unlike traditional IPOs, SPACs offer a faster, less regulated pathway to public market, which is the selling point to many institutional investors. This article explores the regulatory landscape governing SPACs, especially within the Indian context, where SPACs are not yet legally recognized due to the lack clarity on framework on shell companies. Through a critical examination of the Companies Act, 2013, Securities Exchange Board of India (“SEBI”) ICDR Regulations, and other relevant guidelines, the article evaluates the paradoxical regulatory challenges SPACs face under current Indian laws. With a focus on emerging frameworks, India can align its market interests with global financial standards. The article outlines a pathway for integrating SPACs into the Indian securities market, emphasizing the need for a robust regulatory framework that balances innovation with adequate safeguards.
The pandemic most certainly did not turn a blind eye to Securities Market, especiallyin terms of impact. Capital raising from cash preservation became an investor priority. Amid the initial hesitation of global private equity funds towards SPACs, companies turned to global stock markets that rebounded after an initial dip which is largely due to central banks’ interventions with low interest rates and quantitative easing.[1] However, the high volatility of these markets in 2020[2] made traditional Initial Public Offerings (“IPOs”), which rely on under-pricing to generate an ‘IPO pop’, seem too risky for investors.
The emergence of the first generation of SPACs can be attributed to rule 419 of the Penny Stock Reform Act, 1990, which was enacted as a countermeasure to securities fraud involving penny stocks.[3] Rule 419 of the act defined blank check companies and mandated compliance, including depositing initial funds into escrow and filing a registration post-acquisition.[4] However, during mid-1990s, SPACS were largely obviated as smaller companies were successful in raising funds through IPOs driven to the tech boom.[5]
SPACs have recently found prominence amongst entrepreneurs as markets have become more favourable and matured due to the influx of institutional investors.[6] U.S.A, Canada and the UK, have observed SPAC acquisitions and series of SPAC transactions over past few years. From 2009 to present, the number of liquidated SPACs and completed[7] SPACs are 387 and 600 respectively. Furthermore, the number of SPACs undergone liquidation is more than 50% of the number of SPACs that completed the acquisition.[8]
In simple terms, SPACs are companies with no business operations and set up solely for the purpose of raising capital through an IPO. A group of investors, referred to as sponsors, initiate the formation of a SPAC entity by pooling capital which is used to acquire a specific unlisted target company and effectively list it via a reverse merger. Sponsors designate 25% of the equity to themselves, and this bulk of equity is called promote which is used for identifying and acquiring target companies. Post upscaling, sponsors and initial IPO investors purchase SPAC units priced at par.[9]
Following the IPO, the SPAC undergoes hunting stage, which typically lasts two years. Every unit of a SPAC comprises a share and a share warrant, enabling investors to purchase a fraction of a share in the future at a predetermined price.[10] The sponsors hold the founder’s shares, while the public investors hold units which includes common stock and warrants.[11] Essentially, investors are buying into the credibility of the SPAC for future opportunities. If the SPAC fails to acquire a target company as per the memo, it undergoes the process of liquidation. Due to the nature of this structure, there is no substantial loss to the investors and the sponsors. SPACs provide the shareholders the option to redeem their investment at any point without forfeiting theirshare warrant. If the acquisition is unsuccessful, investors’ money is returned along with interest earned by way of treasury notes. Conversely, if the target is determined for acquisition, negotiations over its reverse mergers begin on majority approval. This acquisition process is referred to as the De-SPAC stage.
II. Regulatory Hurdles in Light of Compliance with Current Listing Framework
Currently, there is no legal framework recognizing the operations of an Indian SPAC entity, as India is yet to recognize shell companies. However, SPAC transactions is not completely alien to Indian securities market. The current acquisitions via SPAC occur through a) Outbound Mergers and b) Share Swap Agreements. Recently, 30% stake in Videocon was acquired by Silver Eagle and thereby the shares of Videocon were listed on NASDAQ.[12] Tenzing Acquisition Corporation acquired Reviva Pharmaceuticals Inc. in British Virgin Islands which was later re-domiciled in US.[13] Renew Power, an Indian energy player was acquired by RMG SPAC to get listed on NASDAQ wherein the shareholders retained 70% ownership.[14] Think Elevation, a SPAC consisting of renowned leaders of the Indian tech industry has applied for listing on NASDAQ for the purpose of identifying and acquiring Indian tech-based unicorns. However, due to certain reasons, the SPAC filed a withdrawal registration form with Securities Exchange Commission (“SEC”).[15]
The first and foremost question that needs attention is whether the Indian regulatory system enables the establishment and existence of shell companies. If yes, then to what extent. The Companies Act[16] does not provide a comprehensive definition of “shell company”. As a reply to the Ministry of Corporate Affairs, the standing committee on Finance submitted a report answering key questions regarding definition of shells.[17] The report broadly relied on the OECD report on shell companies that defined shell companies to include special purpose entities within its scope of meaning. The report attempts to list the characteristics of shell companies and common traits such as negligible income, asset, high unsecured loans and no economic rationale in bank transactions are included.[18] The operation of SPACs in India truly depends on how the regulatory framework and authorities perceive the meaning of SPAC. For SPACs to be recognized as a legitimate tool for listing, regulatory authorities need to fully comprehend the capabilities and shortfalls of the tool.
The relevant framework regulating SPACs would be the Companies Act,[19] SEBI ICDR Regulations, 2018[20] and SEBI LODR Regulations, 2015.[21] Listed companies are precluded from being subject to striking off under section 248 as per the Removal of Name Rules, 2016.[22] This is due to the listing requirements that SEBI ICDR regulations propounds.[23] The company must have net tangible assets of at least three crores in each of the previous three years, a minimum average consolidated pre-tax operating profit of fifteen crores during any three of the last five years and the company’s net worth must be at least one crore in each of last three preceding years.” SPACs are listed entities looking to acquire within a period of 2 years inclusive of due diligence and merger negotiations. Therefore, question of assets is irrelevant. This leads to a paradoxical situation where SPACs cannot escape the striking off provision as well as ICDR listing requirements.
However, according to Regulation 6(2) of SEBI ICDR Regulations, if above-mentioned criteria are not satisfied, IPO shall be conducted through book-building process and 75% of offer proceeds must be from Qualified Institutional Buyers. If SPACs are able to fulfil this criterion, then they may get listed under sub regulation 6(2).[24] Furthermore, a company needs to state its primary objectives in its MoA at the incorporation stage.[25] However, it is not plausible for a SPAC to list its objective post-merger, as the SPAC shall have no objective of its own and must adopt the target company’s objectives. An amendment to MoA is also a cumbersome process[26] and further limits the edge that SPAC has as compared to other instruments of listing.
In pursuant of the same, the Reserve Bank of India (“RBI”) and the National Company Law Tribunal (“NCLT”) have to authorise an outbound merger.[27] In the other cases, where a share swap agreement is involved, the RBI Liberalised Remittance Scheme (“LRS”) becomes applicable.[28] Share swap agreements may be preferred as NCLT approval is not a requirement under RBI LRS Scheme. However, remittance of up to 250,000 USD per financial year is only permitted ensuring that there is no harsh impact on Indian Shareholders.
III. SPAC Sponsors and Question of Corporate Governance
3.1 Question of Corporate Governance in Context of SPACs
The criticism of SPACs predominantly revolves around its governance structure and the potential misuse of investor capital. The process to establish a SPAC has a narrow time frame and for the same is attractive in the gallery of financial markets. If this inherent characteristic of SPAC is to be diluted, survival of SPACs would become questionable. Shell companies have for the longest time been perceived to be conduits of illegal and fraudulent activities and not wrongly so. It is only fair that SPACs are perceived with such scepticism by regulatory authorities if they have taken history lessons on financial fraud. The regulatory concerns must be dealt with from a holistic perspective as proposed regulations must be able to comprehend and govern the entirety of process both during the de-SPACing procedure and the final sale of listed shares. Other cross border exchange regulations and treaties signed between both countries shall also be determining points for structuring the SPAC acquisition and listing.
The question of good corporate governance in the context of SPACs is of paramount importance, considering the unique positions of sponsors and shareholders. The process of identifying and determining a target company rests solely with the sponsors. Sponsors have the right to withhold a percentage of shares before listing and, in most cases, are the majority shareholder.
In a recent article in the Harvard Business Review, the author highlighted how the SPAC bubble is on the verge of bursting.[29] One of the key reasons highlighted is the analogy of plenty of fish in the sea doing no good. The SEC has welcomed this anticipated burst and acknowledged the same by mandating a cooling off period according to a Wall Street Journal Article.[30] The qualifications of sponsors are central to discussions pertaining to corporate governance. There are two approaches that can be used to address the problem of plenty, both centred on the sponsor—a crucial participant in the entire process of SPACs.
The first approach involves imposing a minimum limit on the size of a SPAC IPO. This aligns with the UK regulator’s recent consultation paper on SPACs, which mandates a minimum IPO size of 200 million pounds. The second approach is to impose minimum standards for sponsors, ensuring that only qualified individuals who have the sufficient expertise and credibility can establish a SPAC.[31] These two measures conjointly applied would limit the number of SPACs springing up and yet encourage legitimate SPACs. Performance based promotes, linking sponsor incentives to company performance, could be affective way. For example, Pershing Square Tontine Holdings transaction in the U.S. followed this model, where the sponsor invested without a promote, and their profit relied on the company’s success.
3.2 Securing the Position of Sponsors in light of Governance Challenges
Good corporate governance begins with regulating the functions of the sponsors. The promoters or sponsors hold a fiduciary duty to act in the best interests of the shareholders.[32] Regulation 2(1) (pp) of SEBI ICDR defines promoters.[33] Factors such as credibility, expertise and historical records can be considered while determining the eligibility of sponsors. This is where the difference in the social contexts of sponsors in India and USA needs to be considered. Typically, the sponsors of U.S, are professional hedge fund managers. On the other hand, in India, most businesses are sponsor driven. According to a 2020 OECD Report, the total shareholdings of promoters, in terms of market valuation, in the top 500 listed companies peaked at 58% in 2009 and are currently trending lower. In 2018, the promoters held almost 50% of the shares. Concurrently, the market-value percentage of shares held by institutional investors in the top 500 listed businesses rose from approximately 25% in 2009 to 34% in 2018.[34]
There have been attempts by SEBI to streamline the definition of promoters. On 30th December, 2014, SEBI floated a consultative paper on reclassification of promoters as public.[35] Further, SEBIissued another consultation paperon re-classification of promoter/ promoter group entities and the disclosure of promoter group entities in the shareholding pattern, which amended Regulation 31A of SEBI LODR.[36] Recently, SEBI issued a key consultation paper on the review of the regulatory framework for promoter as per ICDR.[37] It aimed to shift the concept of promotors to a broad outlook by referring to them as controlling shareholders. The objective of authorities to encourage professionally managed companies is evident and this might boost the startup ecosystem. However, it has been met with resistance from promoter groups.[38] While India is still in the initial stages of professionally managed funds and companies, ensuring robust corporate governance in SPACs will take significant effort and time. The IPO of a SPAC is predominantly determinant upon the credibility of the fund managers and investor protection is key while discussing the regulation of SPACs.
Other considerations that need to be highlighted include dilution due to redemption, protection of the interests of minority shareholders of SPACs, and the prohibition of forward-looking statement by SEBI. Post IPO and Pre-Acquisition, if shareholders redeem their shares, SPAC equity dilutes. Issuing share warrants to non-redeeming investors could provide an equitable solution. To safeguard the rights of minority shareholders, a potential solution could involve permitting redemption only after obtaining shareholder approval. Given that dissenting shareholders typically make up a maximum of 25% in successful approvals, an equivalent portion of equity, amounting to 25% of the total, could be allocated specifically for redemption. This portion would remain separate from the funds required for the acquisition process. While SEBI ICDR[39] prohibits forward-looking statements that cannot be substantiated. provides a safe harbour for SPACs on the same. Tech companies are attracted towards U.S. for this very reason.
3.3 Appraisal Over IFSC Regulations on SPAC
Regardless of the hurdles, the International Financial Services Centre Authority (“IFSCA”), an international financial market regulator established in Gujarat’s GIFT City for encouraging cross-border transaction. has laid down primitive structures for enabling the functioning of SPACs. Due to the evolving nature of IFSCs and the interaction among various domestic financial regulators, there was a need to establish a unified regulatory body. to create a controlled environment for financial market participants, thereby enhancing the ease of conducting business in IFSCs.
In July 2021, the IFSCA notified the International Financial Services Centres Authority (Issuance and Listing of Securities) Regulations, 2021, enablingIndian companies to list their shares by way of SPAC IPO. SEBI has also constituted a committee that has submitted it’s report on company law discussing the same. These actions signify that the Indian regulatory authorities have acknowledged the need to engage in a regulatory framework for SPACs. While it is only a groundwork that’s in place, extensive and elaborate regulations and recognition for SPACs have not been implemented yet.
IFSCA is a better platform as it consolidates the process of filing approval by setting up a unified and proactive regulatory body. One of the aims of SPAC i.e. speedy listing of companies is achieved by this single window clearance system under IFSC. This impetus also flourishes access to foreign markets and it creates a bridge between foreign investors and institutional funds. These regulations also are relatively simpler and require limited approvals only thereby aligning with the focus on ease of doing business. Considering that businesses operating within International Financial Services Centres transactions in foreign currency, there is no hedging risk for offshore entities engaging with IFSC-based entities, whether they are offshore SPACs with targets in IFSCs or IFSC SPACs with offshore targets. Since a SPAC listed in an IFSC is located domestically but operates within a jurisdiction deemed foreign, merging an Indian target with such a SPAC during the De-SPAC process is likely to be simpler compared to a cross-border merger involving a SPAC listed in a different jurisdiction.
SPACs are inherently perceived by raising red flags due to the potential misuse of the same. However, developed countries with sophisticated financial markets have recognized SPACs and regulated them, thereby addressing their challenges. The recent boom in SPAC transactions has attracted the attention of regulatory authorities across jurisdictions. SPACs promise a way of speedy listing along with price stability. SPACs certainly will have an optimistic welcome by the startup ecosystem that India’s economy is trying to cultivate. They are generally identified as favourable to tech-based startups in other countries owing to their limited capacity to raise capital. SPACs, as a financial tool could be used to its strength when regulated.
IV. Conclusion and Way Forward
India has not formally recognized SPACs, yet. However, in a move in that direction, SEBI has constituted a committee to study possible regulatory frameworks with respect to SPACs. This must be welcomed as an action in furtherance of making the Indian financial markets sophisticated and on par with foreign markets. Currently, shell companies are not recognized by Indian authorities, therefore, that’s where the initial step must be directed at. Presently, SPAC activities are limited to outbound mergers and share swap agreements, as Indian regulations do not fully recognize shell companies, a key component of SPAC structures.
Compliance challenges include stringent requirements under the Companies Act, SEBI ICDR, and LODR regulations that SPACs, by their unique structure, struggle to meet. The merger regulation, objects clause requirement and section 248 i.e. striking off provision all paint a gloomy picture for SPACs. Regulatory mandates such as asset holding, revenue and profitability is in place that a traditional company can meet but SPACs cannot given their pre-revenue, asset – light model. It is not to say that the current regulations were enacted intending to govern all types of companies including SPACs. However, moving forward, special regulations pertaining to SPACs must be introduced to efficiently regulate the working of the same.
Apart from regulatory hurdles, SPACs also present corporate governance issues. The unique position of sponsors where they can exert excessive influence over the decisions of SPACs without doubt attracts challenges to corporate governance since it creates potential actions of mismanagement and oppression. Establishing qualifications and performance based promote structures that work on an incentive-based model for sponsors of SPAC must be considered by authorities as this has a direct correlation with governance and internal regulation of SPACs in light of investor protection. This step would in turn solve the too many fish do no good problem and thus resist dilution of equity. Further, it may substantially reduce the proliferation of SPACs that does not have industry expertise and is functioning based on speculative investments.
SEBI has taken multiple steps to expand the definition of promoters so as to shift from sponsor-oriented business to business managed by professionals like in the United States. However, due to varied political and social reasons, this shift is being resisted by companies and promoter groups. On the bright side, the IFSCA, the international financial market regulator haslaid down the primitive structures for enabling the functioning of SPACs. IFSCA notified IFSCA (Issuance and Listing of Securities) Regulations in2021[40] which enables Indian companies to list their shares by way of SPAC IPO. This signifies that the Indian regulatory authorities have acknowledged the need to engage in a regulatory framework conducive to establishment and functioning of SPACs, which is a welcome move A worked out model by IFSCA in GIFT city would inspire SEBI to set up one within the regulatory jurisdiction of Indian Capital Markets. The future of SPACs within the Indian regulatory space appears to be cautiously optimistic but for Indian markets to fully realize the potential of SPACs, it must adapt policies that align with global practises that balances market integrity and investor protection.
This article is a part of the DNLU-SLJ (Online) series, for submissions click here.
[1]Press Release, US Federal Reserve, Federal Reserve announces extensive new measures to support the economy (Mar. 23, 2020), https://www.federalreserve.gov/newsevents/pressreleases/monetary20200323b.htm . See also Ewa Skornas,‘The Impact of the COVID-19 Pandemic on the Private Equity Market, S&P GLOBAL’ (EMEA Private Equity Market Snapshot, 14 Sep2020), efaidnbmnnnibpcajpcglclefindmkaj/https://www.spglobal.com/marketintelligence/en/documents/emea-private-equity-market-snapshot-issue-26.pdf.> Accessed 19 November 2023.
[2] Sabeeh Ullah, ‘COVID-19 pandemic and financial market volatility: A quantile regression approach’ [2023] Heliyon, 9(10).
[3] Securities Enforcement Remedies and Penny Stock Reform Act of 1990, s. 419. See also Blank Check Offerings, Securities Act Release No. 6,891, Exchange Act Release No. 29,096, 1962.
[4] Daniel S. Riemer, ‘Special Purpose Acquisition Companies: SPAC and Span, or Blank Check Redux’, [2007] WASH. U. L. REV. 931.
[5] DavidN. Feldman, ‘Reverse Mergers: Taking A Company Public Without An IPO’ [2006)] 45.
[6] Amisha Raghuvanshi, ‘The Embryonic Stage of Special Purpose Acquisition Companies in India: Prevailing Obstacles and the Way Forward’, [2022] NIRMA U. L.J. 11.
[7] Completed herein refers to the de-SPAC transaction which shall be explained in further parts.
[8] https://www.spacinsider.com/data/preview/custom-table/Universe.
[9] It is usually held at $ 10 What You Need to Know About SPACs – Updated Investor Bulletin, INVESTOR ALERT AND BULLETINS, US SEC <https://www.investor.gov/introduction-investing/general-resources/news-alerts/alerts-bulletins/investor-bulletins/what-you > Accessed May. 25 2021.
[10] It is usually set at $ 11.5. Mary L Schapiro, Commr of SEC, Address at Annual Northwest Securities Institute; Seking New Sanctions; Comments on Development in SEC’s Enforcement Program, 1990.
[11] In specific cases, according to the business needs, shares also issued to Institutional Investors for secured funding through Private Investment in Public Equity (PIPE) transaction.
[12] Amendment No. 3 to Form F-4 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933. The official statement can be accessed https://www.sec.gov/Archives/edgar/data/1629220/000114420415015960/v403848_f4a.htm.
[13] Amendment No. 3 to Form F-4 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933. The official statement can be accessed https://www.sec.gov/Archives/edgar/data/1742927/000110465920120670/tm2027235-6_s4a.htm.
[14] Registration No. 333- Form F-4, Registration Statement. Can be accessed using https://www.sec.gov/Archives/edgar/data/1848763/000119312521164239/d102215df4.htm.
[15] Withdrawal from registration can be accessed using correspondence available https://www.sec.gov/Archives/edgar/data/1850239/000119312522097596/d116363drw.htm.
[16] Supra at 15.
[17] Ministry of Corporate Affairs, Standing Committee on Finance (2017-18), 16th Lok Sabha, presented to Lok Sabha on 9th March 2018, ‘Fifty – Ninth Report’ can be accessed using < http://164.100.60.131/lsscommittee/Finance/16_Finance_59.pdf >
[18] ibid.
[19] Companies Act, 2013 (India).
[20] Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2018, Pt. II, Sec. 3(ii).Hereinafter referred to as ICDR.
[21] Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015, Pt. II, Sec. 3(ii).
[22] Companies (Removal of Name of Companies from the Register of Companies) Rules, 2016, G.S.R. 99(E), Pt. II, Sec. 3(ii).
[23] Regulation 6, ICDR.
[24] Regulation 6(2) Supra 20.
[25] § 4 (1) (c), Supraat 18.
[26] Ibid. See also Notification No S.) 1353 (E), Ministry of Corporate Affairs (21st May, 2014).
[27] Compromises, Arrangements and Amalgamations) Amendment Rules, 2017, Pt. II, Sec. 3(ii).
[28] Hereinafter referred to as LRS. Res. Bank Ind., Liberalised Remittance Scheme, Frequently Asked Questions (Feb. 13, 2019), https://m.rbi.org.in/scripts/FAQView.aspx?Id=115.
[29] Naumovska, I,’The SPAC bubble is about to Burst’, (Harvard Business Review, 18th February, 2021) <: https://hbr.org/2021/02/the-spac-bubble-is-about-to-burst> Accessed 10 April 2024.
[30] Amrith Ramkumar, SPAC Pullback Pressures Creators to Find Quality Mergers, WALL STREET J. [2021] PL 5.
[31] n 6.
[32] Erlanger v New Sombrero Phosphate Co (1878) 3 App Cas 1218 (HL). See also Lee v Lee’s Air Farming Ltd [1961] AC 12 (PC), Lagunas Nitrate Co. v Lagunas Syndicate [1889] 2 Ch 392 (CA), and Kelner v Baxter [1866] LR 2 CP 174 (Exchequer Chamber).
[33] Reg 2(1) (pp), n 16.
[34] OECD Report (2020), Ownership structure of listed companies in India, < www.oecd.org/corporate/ownership-structure-listed-companies-india.pdf >
[35] Securities Exchange Board of India,Reports for Public Comments, ‘Reclassification of Promoter as Public’, Dec 30, 2014 https://www.sebi.gov.in/reports/reports/dec-2014/re-classification-of-promoters-as-public_28762.html.
[36] Securities Exchange Board of India, Reports for Public Comment, Re-classification of promoter/ promoter group entities and disclosure of promoter group entities in the shareholding pattern. https://www.sebi.gov.in/reports-and-statistics/reports/nov-2020/consultative-paper-on-re-classification-of-promoter-promoter-group-entities-and-disclosure-of-promoter-group-entities-in-the-shareholding-pattern_48236.html. See also Reg 31A LODR Substituted by the SEBI (Listing Obligations and Disclosure Requirements) (Second Amendment) Regulations, 2021.
[37] SEBI Reports for Public Comment, Review of the regulatory framework of promoter, promoter group and group companies as per Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2018, efaidnbmnnnibpcajpcglclefindmkaj/https://www.sebi.gov.in/sebi_data/meetingfiles/apr-2021/1619067358554_1.pdf
[38] Pavan Burugula, Sebi plan faces resistance from promoter-driven companies, The Economic Times, https://economictimes.indiatimes.com/markets/stocks/news/sebi-plan-faces-resistance-from-promoter-driven-companies/articleshow/76378490.cms?from=mdr.(Last Accessed 11th April, 2024)
[39] n 16.
[40] International Financial Services Centres Authority (Issuance and Listing of Securities) Regulations, 2021, Pt. II, Sec. 3(ii).
Student, Tamil Nadu National Law University
