In part 2 of this series of blogs (Key Features IFSC Lisiting Regulations in Relation to Listing of SPACs), we touched upon the newly-introduced framework for the issuance and listing of special purpose acquisition companies (“SPACs”) at the International Financial Services Centres (“IFSC”) under the International Financial Services Centres Authority (Issuance and Listing of Securities) Regulations, 2021 (“IFSC Listing Regulations”). In this part of the blog we are going to look at the IFSC Listing Regulations with a critical eye to detect the gaps that continue to exist despite the framework being put in place and identify areas that can be improved upon to leverage the unique status of entities in IFSC.
Interplay of domestic laws vis-à-vis IFSC Listing Regulations
The interplay of the current domestic laws of India and their applicability/ inapplicability to units in the IFSC is critical in providing the unique ‘off-shore’ status to IFSCs. In our previous two blogs Lessons from ReNew Power overseas listing through SPAC and Using SPAC Vehicles as a Means of Listing Outside India, we have explored the constraints around overseas listing through SPAC of Indian entities, all of which continue to exist for Indian entities aiming to list through IFSC-listed SPACs. Set out below are certain regulatory gaps vis-à-vis listing through the SPAC route in IFSC.
- Merger Restrictions under Indian foreign exchange control regulations and the Companies Act, 2013 (“CA”): A typical SPAC transaction involves merger of the SPAC and the target entity. Considering the off-shore status of GIFT IFSC, it is treated as a foreign jurisdiction for exchange control purposes, and accordingly, SPAC entities set up in IFSC are treated as persons resident outside India and consequently, merger of an IFSC SPAC and Indian target would require compliance with the Indian foreign exchange regulations. While in theory, a direct merger of the Indian target with a SPAC in IFSC is plausible, in practice, compliance with Indian foreign exchange regulations may impose certain regulatory constraints. For instance, when the Indian resident shareholders are individuals (who will be issued shares as consideration for the merger), then Indian law requires compliance with LRS limit of USD 250,000 per financial year for Indian resident individuals and exceeding this limit would necessitate approval from the RBI. Thus, for SPAC transactions to work smoothly in IFSC, a fast-track approval process for the proposed business combination needs to be explored by IFSCA to facilitate the ease of doing SPAC transactions.
Whilst the Ministry of Corporate Affairs (“MCA”) has provided certain procedural exemptions/ relaxations under the CA to companies set up in IFSC, there are no specific exemptions available in relation to cross border mergers. Accordingly, requirement for prior National Company Law Tribunal (“NCLT”) approval would also apply to merger/ amalgamation of an IFSC SPAC with an Indian target under the CA, and vice versa. Further, an order of NCLT sanctioning the scheme of merger/amalgamation is subject to stamp duty, because of which the costs of listing increase significantly, making merger a less favorable business combination for effecting a SPAC listing in the IFSC. IFSCA should provide specifically facilitative provisions of a fast track mechanism for merger with IFSC SPAC companies.
- Operating restriction under the CA: The IFSC Listing Regulations require the issuer to be a non-operating company for it to be eligible to raise capital through IPO in the IFSC. Though the CA does not explicitly impede a SPAC listing, it requires a company to commence business within one year of incorporation. Failure to comply with such condition may result in the registrar of companies (“RoC”) using its power to remove the company’s name from the register of companies. It is worth noting that the recent Company Law Committee (“CLC”) has proposed including an enabling provision to the CA to recognise SPACs and allowing entrepreneurs to list a SPAC incorporated in India on domestic and global exchanges. The CLC further recommended that provisions on relaxing the requirement to carry out businesses before being struck off and providing exit options to the dissenting shareholders of a SPAC if they disagree with the choice of the target company identified must be laid down in the CA. The CLC has also opined that for a foreign listing of Indian incorporated SPACs to become a reality, the commencement of Section 23(3) and 23(4) allowing certain companies to list on permitted stock exchanges is a necessary pre-condition.
- Issue associated with redemption of equity securities: The IFSC Listing Regulations provide redemption right to non-sponsor shareholders for a pro rata pay-out, out of the aggregate amount held in the escrow account (net of taxes payable) for their equity securities, in the event the shareholders have voted against the proposed business combination or change in control of the SPAC. This may be a point of contention as the CA does not provide for redemption of equity securities, and such redemption may either need to be undertaken through reduction of capital or buyback, which may not necessarily be feasible.
- Issues associated with treatment of ESOPs: Another important consideration in a de-SPAC transaction is the treatment of the ESOPs, wherein the employees of the Indian target are offered the option to participate in the ESOPs of a foreign entity in lieu of ESOPs granted to them in the Indian target. The IFSC Listing Regulations are silent on the treatment of ESOPs, and the Indian foreign exchange laws also do not specifically permit swapping of ESOPs in such manner.
- Round tripping: A major hurdle in a De-SPAC with an Indian target revolves around the prohibition on round tripping. The RBI does not permit a person resident in India to invest in an overseas entity, which in turn holds shares in India. Given that a de-SPAC transaction of an Indian target might involve the founders getting shares in the overseas listed SPAC (including an IFSC SPAC) or an intermediate foreign holding structure, this may limit the ability to structure a number of de-SPAC transactions involving externalisation of promoter’s Indian holdings, unless IFSCA provides specific exemptions to such de-SPAC structures involving an IFSC-listed SPAC.
- Applicability of SEBI rules/ regulation: The existing SEBI framework does not permit the direct listing of equity shares of companies incorporated in India on foreign stock exchanges. Given the offshore status of IFSC, the ability of an Indian target to list its securities on IFSC continues to remain a question and requires further clarification from SEBI to avoid any ambiguity around the regulatory oversight of SEBI over an IFSC-listed SPAC or a de-SPAC transaction involving overseas listing via SPAC route.
IFSCA was set up as a unified regulator, with the objective of regulating and developing financial products, financial services, and financial institutions operating at the IFSC. Prior to setting up of the IFSCA, regulators such as SEBI, RBI and IRDAI along with the SEZ authorities had the power to regulate the setting up of banking units, capital market entities (such as stock exchanges, stock clearing corporations, AIFs, etc.) and insurance players in the IFSCs. With the setting up of IFSCA, the power to regulate such financial service providers has been entrusted with it. Accordingly, the gaps identified herein would need to be plugged by the IFSCA as the unified regulator.
IFSC Listing Regulation – is it enough to facilitate SPAC listing?
While the IFSC Listing Regulations are well timed and may offer several opportunities for Indian start-ups and promoters to raise further capital via the SPAC route (particularly for Asia or India-focussed SPACs) to get listed on the IFSC, they may not by themselves be enough to realise the Indian SPAC dream. In addition to a regulatory framework, the investors also look for avenues such as a conducive investment environment in terms of ROI on their investments, marketability, and administrative ease of trading the SPAC’s shares on the relevant exchange. Given the availability of other larger, well-oiled international exchanges, foreign investors may be weary of listing on IFSC since it is an upcoming and developing centre where a SPAC listing and its success are yet to be tested. Additionally, there are also certain shortcomings in terms of the IFSC Listing Regulations, including, inter alia, the following:
- While there is a requirement for sponsor’s track record in SPAC transactions/ business combinations/ fund management/ merchant banking activities, there are no guidelines for ascertaining such track record.
- Discretionary power to consider SPAC listings on a case-by-case basis available to IFSCA without clear assessment criteria.
- While the requirement of fair market value of the business combination to be at least 80% of the escrow amount may be consistent with global exchanges, considering that SPAC listing in IFSC may be primarily done for acquiring Indian targets, this requirement may mean that start-ups and many promising SMEs may not be able to benefit from this.
- While the IFSC Listing Regulations provide for multiple acquisitions during a business combination, they are silent on the procedure and eventualities associated with such transactions, such as applicability of fair market value threshold of 80% of the escrow accounts, feasibility/practicability of extending the sponsor lock-in until completion of the last acquisition, and the point at which the escrow account should be liquidated in such cases. The ability to have business combination involving multiple acquisitions is consistent with other global exchanges- both the Singapore and the US Exchanges require the business combination (which may include more than one acquisition) to be 80% of the fair market value of the escrow account. However, whilst SGX requires that this criterion be satisfied by the initial de-SPAC transaction, the US Exchanges permit this criterion to be satisfied through the aggregate value of multiple acquisitions.
The IFSCA has certainly taken a bold and timely step to come up with the IFSC Listing Regulations in such a short span of time. This shows the ability of the regulator to quickly adapt to the changing business requirements globally and welcome new avenues of investment, such as, SPAC. By permitting SPAC listing at IFSC, it is also likely to allow a wider group of investors to use IFSC as a platform to access investment opportunities in and outside India. Even though SPACs hold a great potential to be a success in IFSCs and the IFSCA Listing Regulations have laid the foundation, there is further catching up required by other domestic regulators as well as the IFSCA to make the Indian SPAC dream a success. Until the regulatory gaps are closed and a conducive ecosystem is developed for listing of SPACs at IFSC, the Indian SPAC dream may still be a distant reality.
 As per Regulation 3 of the Foreign Exchange Management (International Financial Services Centre) Regulations, 2015, “any financial institution or branch of a financial institution set up in the IFSC and permitted/recognised as such by the Government of India or a Regulatory Authority shall be treated as a person resident outside India”. The term ‘financial institution’ includes a company undertaking financial transactions, i.e. “making any payment to, or for the credit of any person, or receiving any payment for, by order or on behalf of any person, or drawing, issuing or negotiating any bill of exchange or promissory note, or transferring any security or acknowledging any debt”.
 Section 234 of the CA
 Section 248 of the CA.
 RBI is looking to introduce fresh regulations around round tripping and has come up with draft regulations around the same under the Draft Foreign Exchange Management (Non-debt instrument-Overseas Investment) Rules, 2021. According to such draft rules, any investment made outside India in an entity which in turn invest in India, will be treated as round tripping if the purpose is to escape tax. Thus, it prima facie appears that certain structures may be permitted if there is no tax avoidance involved.