MUMBAI: Two state regulators – domestic market watchdog Sebi and its counterpart to Gujarat’s GIFT City, the International Financial Services Centers Authority (IFSCA) – are on track to facilitate the establishment of Special Purpose Acquisition Companies (SPACs) in India. As the name suggests, SPACs are formed with the specific purpose of acquiring one or more companies. However, at the time of formation, the companies do not disclose the names of the targets.
SPAC-like structures have existed for years and are mainly operated by private equity actors. Recently, however, they have been gaining popularity in developed markets. These structures are also known as “blank check companies” because investors other than those who create them usually do not know which acquisition target or which company assets they are investing money in until they are offered by the SPAC. According to market participants, this aspect makes these structures inherently a risky undertaking for private investors.
On Thursday, Sebi formed a committee to examine the feasibility of introducing SPAC-like structures in India, the PTI news agency reported. Sebi’s decision came a day after IFSCA chairman Injeti Srinivas said the regulator was on track to develop its own regulatory framework “to make it easier for startups to raise capital by selling equity.”
It also comes as the Department of Corporate Affairs pushes for standards for direct listing of companies on foreign stock markets – an issue stalled by the reluctance of the Treasury department to give up its right to tax capital gains. While ReNew Power has already announced that it will collect donations via the SPAC route, others like Grofers are considering the option. More Indian companies are expected to join in the coming months.
Sebi has hired its Primary Market Advisory Committee (PMAC) to investigate this structure and to submit its report at the earliest, the report says. Sebi would like to examine the potential of SPACs while at the same time building appropriate checks and balances in a regulatory framework to take into account the associated risks.
The Sebi SPAC Committee has to deal with various regulatory challenges for these structures. This includes whether private investors are allowed to invest in these structures in view of the high risks associated with SPACs. If they are allowed, what types of protections should they have, including when these investors might be allowed. SPACs have legal challenges. “The Companies Act 2013 requires a company to start operating within one year of its incorporation. This may not fit a SPAC that may be out of business for almost two years, ”a company secretary was quoted as saying in the report.
Operating in a relatively new and emerging environment where some of India’s laws are inapplicable, IFSCA intends to evolve as a global business hub, keeping pace with global economic and financial trends.
“We will soon develop the SPAC legal framework because that is the taste of the day. When it comes to startups, they’re not very well-known entities. If they do an IPO themselves, there may not be many takers, ”Srinivas said at a Ficci conference. “So some established players will come with a blank check company and they will use their credibility to raise money and then identify a suitable target company and partner with that company within two or three years,” he said.