Role of IFSC in the Indian SPAC Dream: An Overview – Part 2

By Dhruv Singhal, Ketaki Gor Mehta, Ravi Shah, Sonakshi Arora & Avani Dalal on September 29, 2021

Posted in Financial Institutions, Investments

In part 1 of this series of blogs (Role of IFSC in Indian SPAC Dream- An Overview), we succinctly summarised the various dimensions of IFSCs, viz. their ‘foreign territory’ status in India, applicable laws and regulation and the development of regulatory regime for special purpose acquisition companies (“SPACs”) listings therein.

In this blog we are going to touch upon the key regulations relevant for listing SPACs at the IFSC. The notification of the International Financial Services Centres Authority (Issuance and Listing of Securities) Regulations, 2021 (“IFSC Listing Regulations”) by the IFSCA on July 16, 2021 is a significant milestone paving the way for IFSCs in India to get on the SPAC bandwagon. By formulating a comprehensive framework for the issuance and listing of SPACs, the IFSCA and the government of India have shown their determination in making Indian IFSCs globally competitive. Thus, IFSCs provide a great opportunity for domestic and international investors to use it as a platform to float their SPACs and subsequently acquire unlisted operating business in India as well as globally. It also sets the stage for unlisted Indian companies to list on an international exchange at the IFSC pursuant to a De-SPAC transaction involving the SPAC company listed at the IFSC. Some of the key features of the IFSC Listing Regulations in the context of SPAC listing are set out below:

Sr. No	Provision	Particulars
1.	Eligibility Criteria	Eligibility criteria for SPAC[1] to raise capital through an IPO of specified securities on the recognised stock exchange (“RSEs”): – the issuer is a company incorporated in IFSC, India or any other country that is FATF compliant; – the issuer is duly incorporated in accordance with the laws applicable in the place of its incorporation, is compliant with its constitution and listing of the SPAC securities in the IFSC is compliant with the laws applicable in the place of its incorporation; – the target business combination[2] has not been identified prior to the IPO; and – the SPAC has the provisions for redemption and liquidation in line with the IFSC Listing Regulations. A sponsor[3] of the SPAC issuer should have a good track record in SPAC transactions or business combinations or fund management or merchant banking activities, which should be disclosed in the offer document. An issuer is ineligible to issue securities if the issuer or any of its sponsors is: – debarred from accessing the capital market; or – a wilful defaulter; or – a fugitive economic offender.
2.	Issue Size	Issue size: not less than USD50 million or any other amount specified by IFSCA from time to time. The sponsors are required to hold at least 15% but not more than 20% of the post issue paid up capital. Additionally, the sponsor is required to have an aggregate subscription (all securities) in terms of amount in the SPAC prior to or simultaneous with the IPO, amounting to at least 2.5% of the issue size or $10 million, whichever is lower, or any other amount as may be specified.
3.	Pricing	The issue to be through a fixed price mechanism and the issuer will determine the price in consultation with the lead manager(s).
4.	Offer Period	Issue to be kept open for at least three working days with a maximum of 10 working days
5.	Underwriting	At least 50% of the underwriting commission to be deferred until successful completion of the business combination, and to be deposited in an escrow account. In case of liquidation, the underwriter to waive their rights on the deferred commission deposited in the escrow account.
6.	Minimum Subscription	For the offer to be successful, the following conditions are required to be satisfied: – the minimum subscription received in the issue to be at least 75% of the issue size; and – the minimum number of subscribers to be 50 or as may be specified
7.	Application and Allotment	Minimum application size to be USD 100,000. No single application to be allotted more than 10% of the post issue capital and allotment to investors to be on a proportionate/ discretionary basis, as disclosed in the offer document.
8.	Use of IPO Proceeds	The entire proceeds of the IPO are required to be kept in the interest-bearing escrow account controlled by an independent custodian until consummation of the SPAC‘s business combination e. De-SPAC. Interest and other income derived from the amount placed in the escrow account may be withdrawn by the SPAC issuer for the following purposes: (a) payment of taxes; and (b) general working capital expenses, subject to prior approval by way of special resolution of the shareholders other than sponsors.
9.	Key SPAC Specific Obligations Securities	The securities proposed to be listed on a RSE should be freely transferable and held in dematerialised form. The price of the equity shares in the IPO cannot not be less than USD 5 per share. In case warrants have been issued in the IPO, following compliances are to be made: – Each unit may consist of 1 share and no more than 1 share purchase warrants; – The exercise price of the warrants to not be lower than the price of the equity shares offered in the IPO; – The warrants may be detached with the equity shares and traded separately on the recognised stock exchanges provided that details have been appropriately disclosed in the offer document; – The warrants cannot be exercised prior to the completion of the business combination; – In case of liquidation of SPAC, the warrants will expire; and – The warrants will not have any entitlement to the funds lying in the escrow account upon liquidation or redemption.
10.	De-SPAC Transaction or Business Combination	Business combination is required to have an aggregate fair market value equal to at least 80% of the aggregate amount deposited in the escrow account, excluding deferred underwriting commissions held in escrow and any taxes payable on the income earned on the escrowed funds. There should not be any related party transaction or connection of sponsor or any of their associates with the business combination. The SPAC is required to file a detailed prospectus giving full disclosures relating to the business combination, while seeking shareholders’ approval so as to enable the shareholders to make an informed decision. Prior approval by way of majority of shareholders other than sponsors to be obtained, for the proposed business combination.
11.	Redemption and Liquidation	Pro-rata redemption right is available to a shareholder (other than sponsors) who votes against the proposed business combination (net of taxes payable). Pro-rata redemption option is available to shareholders (other than sponsors) in the event of change in control of the SPAC (net of taxes payable). The business combination to be completed within the timeline disclosed in the offer document, not exceeding 36 months from the date of listing on the RSE, and if the business combination is not completed within the permitted time frame, the escrow account is required to be liquidated. In the event of liquidation and delisting, the sponsors are not allowed to participate in the liquidation distribution the underwriter must waive their rights on the deferred commission deposited in the escrow account.
12.	Lock in Post Business Combination	The shareholding of the sponsors of the SPAC in the resulting issuer as well as the promoters, promoter groups, controlling shareholders, directors and key managerial personnel[4] of the resulting issuer will be locked up for a period of one year from the date of closing of the business combination.
13.	Disclosure Requirements	Detailed disclosures about the SPAC and its sponsors are required to be made in the offer document pursuant to which shares of the SPAC are listed. Detailed disclosures about the business combination are required to be made in the offer document to be filed with the RSE, while seeking shareholders’ approval for the business combination; The IFSC Listing Regulations also prescribe various post listing and post business combination disclosure requirements that the SPAC entity is required to make periodically, in order to ensure that the investors in the SPAC are duly updated.

The IFSC Listing Regulations have endeavourerd to provide benefits and checks and balances that the regulatory framework in other jurisdictions have provided for listing of SPACs. By requiring minimum shareholding for sponsors, ensuring lock-in of sponsor shareholding, allowing restrcitive ability for change of control before a De-SPAC, safekeeping of IPO proceeds in the escrow, ensuring completion of business combination within a reasonable timeline, making appropriate disclosures to shareholders, obtaining shareholders consent for potential business combination and disallowing/disabling the sponsors to vote on the business combination, the IFSC listing framework has tried to put in place ample fail-safe measures to make the SPAC structures more shareholder friendly. The ablove measures ensure that the sponsors have their skin in the game right from the start till the completion of De-SPAC transaction and even post De-SPAC, and also allow the investors an easy exit if they do not wish to continue with De-SPAC transaction.

As noted from the overview above, a SPAC involves many aspects which are relevant at the time of listing, as well as during the lifecycle of the SPAC including the De-SPAC transaction. The following flow chart provides a broad indication of the steps to SPAC listing at the IFSC:

Steps to SPAC listing at the IFSC

Regulators across the globe are taking the necessary actions to enable formation of SPACs and listing through them. While western jurisdictions like the US and the UK are leading, very few Asian jurisdictions have taken steps to allow listing through SPACs. Apart from GIFT City, Singapore is also amongst the few financial hub in Asia to allow SPACs to list.[5] Considering the benefits of SPACs, i.e. an alternative fund raising route with greater certainty on price and execution, Asian start-ups and promoters may find it feasible to list through SPACs in the IFSC. The IFSC Listing Regulations in relation to SPACs is comparable with and is based on the regulatory framework worldwide. However, we will have to wait and watch whether Indian markets would be conducive to SPAC IPOs in IFSCs or investors would be comfortable in accepting SPACs in IFSCs.

Watch this space for the next part in this series. In Part 3 of this series, we would analyse the feasibility of the IFSC Listing Regulations, including opportunities provided and legal gaps that the domestic regulations pose on listing of SPACs, and suggest areas of improvement to further leverage the benefits that IFSC as a ‘foreign territory’ offers.

[1] Reg. 2(s) of the IFSC Listing Regulations define the term Special Purpose Acquisition Company or SPAC to mean “a company which does not have any operating business and has been formed with the primary objective to affect a business combination”.

[2] Reg. 2(b) of the IFSC Listing Regulations define the term business combination‖ to mean “a merger or amalgamation or acquisition of shares or assets of one or more companies having business operations”.

[3] As per Reg. 68(2) of the IFSC Listing Regulations, sponsor means a “person sponsoring the formation of the SPAC shall and include persons holding any specified securities of the SPAC prior to the IPO”.

[4] Reg. 2(o) of the IFSC Listing Regulations define the term key managerial personnel‖ to mean “the officers or personnel of the issuer who are members of its core management team (excluding board of directors) and includes members of the management one level below the executive directors of the issuer, functional heads and includes key managerial personnel‘ as defined under the Companies Act, 2013 or any other person whom the issuer may declare as a key managerial personnel”.

[5] On September 2, 2021, Singapore Stock Exchange announced new rules enabling SPACs to list on the Mainboard of Singapore Exchange Securities Trading Limited, effective September 3, 2021.

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Role of IFSC in the Indian SPAC Dream: An Overview – Part 2

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