As per current norms, only operating companies are allowed to be listed. Currently, for public listing, a company needs to have assets of at least Rs 3 crore in the three years before the listing and minimum pre-tax operating profits of Rs 15 crore during any three years out of the last five years. The company would also need to have a net worth of Rs 1 crore at the least in all of the preceding three years.
So, what are special purpose acquisition companies?
SPACs are companies that are formed to raise funds via IPOs so as to use these proceeds to acquire businesses that have been identified for the same post the IPO. These are called blank cheque companies in the United States. The only purpose of forming SPACs is to acquire another firm, aka, target company. These SPACs don’t have operational purposes. The institutional investors who form these companies would need to identify the target company in a specific timeframe and invest the IPO proceeds in such a firm, based on the approval of shareholders. If this identification of a target company doesn’t occur in the timeframe or the proceeds aren’t invested, the funds from the IPO are returned to the investors along with interest.
In India, the SPAC concept was in the spotlight recently when a renewable energy company, ReNew Power, took the SPAC approach to get listed on Nasdaq. Although SPAC deals are seeing a rise around the world, they are yet to turn big in India. There have been a few deals including Videocon d2h and Yatra India which took the US-listed SPAC routes but they have been few and far between.
Regulatory issues around SPAC formation in India
To ensure that SPACs can be allowed in India, SEBI may have to introduce or amend legislation to allow the listing of companies that are non-operating or investment firms. The SPAC model comes with some risk for the retail investors and minority shareholders, and therefore, SEBI plans to ensure that the interests of these investors are safeguarded. The Companies Act, 2013 may also be amended before SPACs are allowed to be formed in India. Currently, according to the Companies Act, a company is needed to start business within a year of its incorporation. However, SPACs may not have any business for two years and this means there is need for amendment to the Act.
The capital markets regulator may look at the amount of funding that SPACs can raise, and who can participate. There may be stringent rules on the refunding of the proceeds if the SPAC fails to acquire a target company. Also, concerns over which stage retail participation needs to be permitted have to be addressed.
It may be recalled that SEBI had formed an expert group to look into the feasibility of SPACs in India. One of the recommendations of the group is to limit retail participation in a bid to safeguard the interests of small retail investors.
Meanwhile, there are also taxation concerns, which may make SPACs not feasible or attractive for domestic retail investors. Also, Indian investors may not find the concept of investing in firms without any business or operating assets attractive.
Opportunity for start-ups
If there is a dedicated framework for SPACs in India, it would open up new opportunities for high-growth locally grown companies to tap into the market. The listing of such special companies would push more startups to list in India rather than abroad. Many unicorns in India have in the recent past been looking at overseas listings but don’t have the eligibility to list on the Indian markets. According to Credit Suisse, India has at least 100 highly valued startups, each worth over $1 billion and a combined market cap of $240 billion, which are unlisted.
SEBI has taken note of the startups and the limitations around their listing, and therefore even started a separate platform called the Innovators Growth Platform or IGP in 2019. Under relaxed rules, a company may list on IGP if its 25 per cent capital requirements pre-issue are held for a minimum of one year by institutional investors. SEBI has also said that open offer for entities listed on the IGP would be triggered at 49 per cent share acquisition as against an earlier 26 per cent. Delisting rules have also been made easy but the IGP has not yet seen any companies listed.
SEBI’s plan to create a separate framework to allow companies to take the SPAC approach would mean tapping into the mature IPO market in India. The regulations, while protecting the interests of retail investors, would also ensure startups are listed in India rather than get listed in foreign exchanges.