Regulatory Framework for SPAC in India
Having a look at the nature of SPACs, corporate and securities law regime in India is not prepared to support such transactions. Beginning with the Companies Act, 2013, SPAC or any related route of raising capital is not provided under the act. As under the act a company can be strike off by registrar of companies, if it does not commence operation within a year of its commencement. And on contrary to this a SPAC take a time period of two years to acquire its target and perform due diligence on the same.
Further, there is no business object attached to SPAC. It is just a platform which can be used by target companies and sponsor to raise money and equity. There will always be a possibility in such situation that the name of a SPAC would be removed from the books and sponsors will be penalised.
Therefore, in order to make SPACs functional in India its enabling provisions should be inserted in the Companies Act. SEBI (ICDR) Regulations, 2018 provide the eligibility criteria for an IPO. This criteria under Regulation 6 provides that an issuer shall be eligible only if it has net tangible assets of three crore rupees, has an average operating profit of fifteen crores and a net worth of one crore rupees for at least three years.
The Operational benefits and net tangible assets are absent in case of SPAC and hence it would prevent them for becoming an IPO in India. Apart from these, there are several other requirements for IPO. When we try to apply these conditions for SPAC, it would not be able to make an offer.
As discussed, SPAC is a vehicle for a specific purpose, and it does not have any assets. Therefore, an exemption will have to provide for listing of SPACs in the Indian markets. NSE and BSE are the most popular exchanges in India, and both these have certain requirements for listing.
Apart from compliance with all the regulations by the SEBI, NSE requires operational cash accruals for certain specific years. This would again make SPACs ineligible for listing.
Similarly, separate provisions and exemptions under the Income Tax law might be required for a system of SPAC to sustain in India. Currently, SPACs which are based in foreign are acquiring target companies based in India, but the other way around is not possible.
If it were, the capital gains tax would be applicable as per the act and any asset derived from transfer of capital asset will be taxable in India. With respect to SPAC, the tax will fall in the hands of the shareholders. To incorporate SPAC in the Indian legislation certain changes will have to be made in the existing laws.
There has been recent surge in listing of companies in India and globally, a faster route for listing compared to the traditional route of IPO seems to be the latest trend which is yielding results.
The route of SPAC if framed properly shall encourage and attract greater investments in India and provide a platform for small companies to raise capital. To set up such a transaction in India a high quality of due diligence would be required. Recently, International Financial Services Centre Authority (IFSCA) came up with a consultation paper on issuance and listing of securities regulations 2021.
It provides for enabling a framework for listing of SPAC on the recognised stock exchanges. This is a welcome move, but it must be understood that the only IFSC in India is the GIFT City in Gujarat which is yet not fully functional and at a very developmental stage.
Currently, we require a faster development of a framework to reap the benefits of current level of capital market valuations. Countries such as US, Europe and Australia have already been successfully able to implement a framework for SPAC which has enabled them to gain the first mover advantage in tapping potential businesses and operations.
India, being a hub of such businesses, needs to come up with such framework so that the potential of private companies are not lost to international SPACs.
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