A Critical and Comparative Analysis of India’s Proposed SPAC Listing Regime by IFSCA: Balancing the Rights of Founders along with Protection to Investors

 [By Aastha Bhandari

The author is a student at the O.P Jindal Global University.

Introduction

This article intends to address that while India is joining the race to becoming an attractive destination for the listing of Special Purpose Acquisition Companies (hereinafter referred to as “SPACs”) through the proposed International Financial Services Centres Authorities (Issuance and Listing of Securities) Regulations of 2021 (hereinafter referred to as “IFSCA Regulations”), Indian regulators and legislators must consider the local peculiarities of Indian corporate culture. It is in this context that the article argues that there is a need for balancing between the two factors which are essential to the success of SPACs in India. Firstly, there must be facilitation of ease of doing business by providing entrepreneurs with this alternative way of capital raising. However, it is extremely important to consider the passivity of retail investors in India and the issues emulating from the same. As such, there must be provisions for investor protection in the SPAC listing rules, especially from the perspective of retail investors due to the issues concerning corporate governance in India.

Thus, hereinafter is an attempt to undertake a comparative analysis of the functioning of SPACs in India with four foreign jurisdictions (hereinafter referred to as “said jurisdictions”), namely, United States of America (hereinafter referred to as “U.S”), Malaysia, Singapore and the United Kingdom. (hereinafter referred to as “U.K”) Through this analysis, the author seeks to determine whether the proposed IFSCA Regulations meet the bar for providing rights to founders along with ample investor protection and whether there are any good practices from said jurisdictions that may be implemented in India to better achieve the smooth operation of SPACs.

Comparative Analysis of Four Jurisdictions:

  1. As per Regulation 68 of the IFSCA, it has the authority to approve the listing of an SPAC on the IFSC as per its own discretion. The Regulation provides the terminology of “on a case-by-case basis.” There are no explicit restraints on this power of the IFSCA which in turn may have an impact on the ease of doing business if the decisions are arbitrary or motivated by personal and political considerations. This may lead to situations where the SPAC in question has fulfilled all the statutory requirements including, but not limited to, those of filing of the offer document and initial disclosures made therein, minimum size and minimum subscription however it may still not be allowed to be listed on account of this power. As such, this Regulation requires an amendment by at least mandating that the IFSCA must record the reasons for disapproving the listing of an SPAC and publish it in the public domain. The legislative intent of this particular Regulation is unclear as none of the said jurisdictions provides for such a condition.
  2. Regulation 71 provides for the initial disclosures to be made in the offer document of the SPAC. This is an extremely important document as it enables the investors to make an informed decision related to their investment in the company. Thus, there must be enough disclosure requirements to provide investors, especially retail investors, protection through the way of easy access to information about the company. Some of the significant disclosure requirements as per the Regulation include the disclosure of risk factors, basis of issue price, tax implications, previous acquisition experience of sponsors, target business sector or geographical area of the SPAC if any, valuation methods intended to be used for business acquisition, remuneration and benefits to the sponsors, outstanding litigations and the limitation on the exercise of conversion rights for shareholders who vote against the proposed business combination if any. However, this article argues that this may be insufficient as the IFSCA has provided extremely broad parameters in the current proposed Regulations. This Regulation must be amended or supplemented by rules to ensure that the SPAC sponsors and directors are held accountable for their actions. This argument finds its root in the Disclosure Guidance issued by the Division of Corporate Finance of the U.S SEC on December 22, 2020. The Guidance asked SPACs to disclose significant considerations in their offer document, such as potential conflicts of interest between the sponsors, directors and shareholders in terms of their economic interests; how the outstanding litigations or other conflicts may affect the ability of the sponsors to make a decision about the final business combination; and description of the financial incentives of the SPAC sponsors and how they may be different from those of shareholders. Also, it is crucial to not only disclose previous experience in the acquisition of the sponsor but also how the prior outcome of the presented and completed business combination has taken place. The aforementioned illustrates how detailed and descriptive the disclosures in India must be made too.
  3. As per Regulation 72, the issue size of the SPAC must not be less than USD 50 million. Prima facie, this numerical value is much lower in comparison to the said jurisdictions. This can evidently be illustrated through the following table: (hereinafter referred to as “TABLE 1.1”)
Jurisdiction Issue Size
U.S Not specified
U.K 100 Million Euros
Malaysia RM 150 Million
Singapore Not specified but requirement of minimum market capitalization of 150 million dollars.

TABLE 1.1

However, according to Ashwin Bishnoi, who is a partner at Khaitan & Co, the value of USD 50 million is a delicate balancing act. This is because if the issue size for the SPAC had been made too small, then it would not have been possible to attract large and long-term investors. On the other hand, had the size been made too large, then Indian start-ups and SMEs would not have been eligible to participate in the business combination. Considering the local peculiarities of India, this seems to be the right decision.

4. Regulations 81 to 89 provide several provisions relating to investor protection. However, it is important to consider whether these are sufficient to protect retail investors alongside institutional investors. As per Regulation 81(1),  90 percent of the proceeds from IPO are to be deposited in an interest-bearing escrow account which is to be controlled by an independent custodian. This ensures that the investor’s money is not misappropriated for personal gain. Further, as per Regulation 82, shareholders are given the right to vote on the proposed business combination whereas sponsors are not. The votes of majority of the non-founder shareholders is a requisite for proceeding with the combination. This approach is almost identical to the approaches followed in said jurisdictions which can be seen through the following table: (hereinafter referred to as “TABLE 1.2”)

Jurisdiction Right of Sponsors to Vote on Proposed Business Combination Approval of Shareholders for Business Combination
U.S No at least 60% of the shareholders and in some cases up to 80%
U.K No majority of shareholders
Malaysia No approval by majority in no. representing 75% of shareholding
Singapore No Majority of shareholders

TABLE 1.2

5. Further, as per Regulation 82(2), dissenting shareholders have a right to redemption of their investment but there is a catch here. This redemption right will not be applicable to the entire amount invested by the investors and will be subject to a pro rata portion of the aggregate amount. This means that if shareholder X purchased a share of the SPAC at Rs. 12, its face value being Rs. 10, at the time of redemption thy would only be able to redeem Rs.10. As such, the dissenting shareholders are subject to certain loss. As per estimates from the Singapore Stock Exchange (hereinafter referred to as “SGX”), this loss cannot be greater than 10 percent theoretically. Most of the said jurisdictions follow a similar approach. However, as per the recent changes made by the Financial Conduit Authority of U.K to its SPAC Listing Rules, the redemption can either be a pro rata share of the IPO proceeds or at a fixed pre-determined price. The approach opted by the SPAC must accordingly be disclosed in its initial prospectus. This article suggests that the IFSCA can also provide the two options for redemption, which must be disclosed initially so that the concerned investors can make an informed choice.

6. As per Regulation 83, the time period for completing the business combination is limited to 36 months. This may be extended for 12 more months, subject to an approval of 75 percent of the non- founder shareholders. The time period is significantly more compared to the said jurisdictions. This can be seen through the following table: (hereinafter referred to as “TABLE 1.3”)

Jurisdiction Time Period for Business Combination/ De-SPAC
U.S 18-24 months
U.K 24 months
Malaysia Within permitted time frame
Singapore 24 months

TABLE 1.3

This article argues that the larger period of time is in accordance with the fact that India does not have a developed SPAC market yet. If the time period is too short, it will, in turn, affect the investors as the entire venture would have to be liquidated. However, IFSCA Regulations do not account for a situation wherein an extension of time may be granted when the parties are amidst completion of the business combination. In the Consultation Paper on SPACs released by SGX, there was a proposal to allow for the aforementioned if it is in the interest of all parties wherein they stated that in order to seek this specific extension a special resolution would have to be passed with the approval of the shareholders. Thus,  India could also consider adopting such an approach. It is also notable that the jurisdictions of the U.K and Singapore have specifically pointed out the need for the opinion of an independent valuator and financial adviser on the proposed business combination, which must be informed to the non-founder shareholders. This should ensure that there is no prejudice or bias of the sponsors that may endanger the interests of the investors. The IFSCA must include this as a specific obligation for the listing of SPACs in India.

7. Further, the investor protection is also evident through Regulations 85, 86 and 89 whereby the sponsors are not permitted to do away or transfer their specified securities prior to and post the completion of the business acquisition. This follows from the founder’s skin in the game ideology. However, as per Regulation 89(3), the lock-in period post the combination is 180 days. It is important to consider whether this period should be increased on account of the features of an SPAC and the risks it poses to investors, especially in a country like India where agency problems have still not been tackled by the regulators. The stark example of the eminent hedge fund manager, Bill Ackman can be used here. Ackman incorporated one of the most highly valued SPACs worth USD 4 million and dissolved it, leading to heavy losses for the shareholders. The entire point of incorporating a SPAC is to enter a business combination with a private target company to convert it into a public company. However, Ackman had other plans and was planning on using the funds of the SPAC IPO for another purpose to which the U.S SEC objected to. As such, Indian regulators can imagine an increased lock-in period of a year so that investors do not have to bear the brunt of underperformance or failure of the SPAC alone.

III: Concluding Remarks and the Way Forward

While the SPAC route of raising capital is gaining a lot of momentum, we must remember to balance its risks and utilities in the Indian context. Since the surge of SPACs between the years 2020 to 2021, critics say that the bubble is about to burst. Even the U.S SEC is under the worry that retail investors in SPACs are not being adequately protected.  It is extremely concerning to note that a study by Reuters saw results that “100 SPACs that announced mergers in 2021 gained less than 2 percent of the price they traded at when they first listed on the stock exchange.” As such, the investments by retail investors have fallen drastically.

There is a need to balance the utilities and risks related to SPACs. India must tread the SPAC route very carefully and learn from lessons from well-developed jurisdictions like the USA. Although SPACs have several key benefits including simpler and faster access to funds in comparison to traditional IPOs, one cannot ignore the fact that billions of dollars are sitting in escrow accounts waiting to find a target to deploy their funds. Indian authorities must also consider the issues concerning dilution of shareholders’ interests, particularly retail investors, before notifying the final SPAC listing rules.

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