Beyond GIFT City: A Case for a Domestic SPAC Ecosystem

[Devanshi Ganta, a fourth-year B.A. LL.B. (Hons.) student at the National Law School of University, Bengaluru.]

Introduction

Recently, Agility Robotics, a startup that creates humanlike robots, announced plans to go public through a $2.5 billion deal with Churchill Capital Corp. XI, a Special Purpose Acquisition Company (‘SPAC’).  Similarly, Newcleo, a French nuclear developer, announced plans to go public via a SPAC merger valued at $2.4 billion.  Though SPACs cratered after the boom in 2020, they seem to have regained momentum recently. These developments suggest that SPACs remain a viable alternative to traditional initial public offering (‘IPO’) routes. A SPAC is a blank-cheque company that raises capital through an IPO with the sole objective of acquiring or merging with an unidentified private company within a fixed period, thereby allowing the target company to go public without undergoing a conventional IPO.

India was not a passive spectator to the growing popularity of this alternative capital-raising mechanism. The International Financial Services Centres Authority (‘IFSCA’) notified the IFSCA (Issuance and Listing of Securities) Regulations, 2021 in the Gujarat International Finance Tec-City (‘GIFT City’), permitting SPACs to list on GIFT City’s stock exchanges. However, due to the unique nature of GIFT City, this permission is limited in scope. Despite being permitted since 2021, no SPAC has yet been floated in GIFT City. Moreover, there is virtually no official communication regarding SPACs in recent years, either from the government or the relevant regulatory body. This silence may be suggestive of an abandonment of efforts to create a SPAC-friendly environment in India.

I argue that SPACs can be a viable alternative to traditional IPOs, particularly for start-ups, if given a proper opportunity through the setting up of a domestic SPAC-friendly framework. I further argue that GIFT City’s SPAC framework cannot be taken as a meaningful metric to gauge SPACs’ popularity in India. I advance three positions: first, the domestic regulatory ecosystem in India regarding SPACs. Second, the SPAC framework in GIFT City was designed to fail, owing to regulatory and socio-capital constraints. I conclude with a brief recommendation for implementing a workable SPAC framework in India.

Understanding SPACs in India

Despite SPACs being in existence since the 1990s, they only reached their peak during the volatile period of 2020-21. This may be attributed to the fact that the merger price is pre-determined through negotiations between the SPAC and the target company. Further, SPACs can secure additional funds through private investment in public equity (‘PIPE’) financing, if required. These features of SPACs provide them with an edge over conventional IPOs, which may be more susceptible to market volatility. Despite SPACs being barred from listing on domestic stock exchanges in India, several SPAC transactions involving Indian companies have been successfully executed, resulting in the listing of the merged entity on foreign exchanges. The most recent example is ReNew Private Limited, which went public in 2021 through a merger with RMG Acquisition Corp II, a SPAC.  The combined entity was subsequently listed on NASDAQ, debuting with an enterprise value of approximately $8 billion. Similar transactions involving Yatra Online Inc. and Videocon d2h took place in 2016 and 2015, respectively. Beyond using SPACs to list abroad, Indian nationals have also sponsored SPACs to merge with foreign businesses, though most of them have been unsuccessful.

Given the enthusiasm shown by Indian companies, both in using SPACs and in acquiring foreign businesses through them, it is unclear as to why India has not made a more concerted effort to bring SPAC-friendly legislation into force domestically. Currently, Indian law does not explicitly recognise SPACs under the domestic corporate and securities framework. Several existing laws and regulations make it practically impossible for a SPAC to function as a legal entity. For instance, Section 248 of the Companies Act, 2013, provides for the striking off of a company that has not commenced business within one year of incorporation.  Since SPACs do not have any operations as they are blank-cheque companies, this would automatically render their incorporation unfeasible. Furthermore, the SEBI (Issue of Capital and Disclosure Requirements) Regulations 2018, require a company to have an operational history and tangible assets before raising finance from the capital markets, something that SPACs cannot satisfy. Regulation 6(1) is illustrative of this. It provides that there must be tangible net assets of ₹3 crores, as well as profits in any of the three out of the last five years for the company to issue a public raise.  This becomes problematic since SPACs do not have any operations or assets till the completion of the de-SPAC transaction.

Though Indian laws do not allow listing of a SPAC in its domestic stock markets, it did, however, allow for the same in GIFT City way back in 2021. This may appear to be a first step toward testing the SPAC model in India, but as mentioned above, it is a wrong metric. This is due to the unique nature of GIFT City, which poses its own unique problems, making it an unreliable benchmark for assessing the viability of SPACs in domestic markets.

Why GIFT City was destined to fail in relation to SPACs

Recognising the growing popularity of SPACs around 2020-21, India permitted the listing of SPACs in GIFT City. This created an opportunity for both domestic and international investors to float SPACs on this platform and subsequently acquire unlisted operating businesses in India and globally. This remains the only avenue through which SPACs can be listed in India. Two primary international stock exchanges currently operate in GIFT City: India INX (India International Exchange), a wholly owned subsidiary of the Bombay Stock Exchange, and NSE IFSC Limited, a wholly owned subsidiary of the National Stock Exchange. Both exchanges commenced trading in 2017. Despite SPACs being permitted since 2021, not a single SPAC has been listed in GIFT City to date. This can be attributed to two distinct yet interconnected reasons.

The absence of social capital

The foundational problem in GIFT City is one of ecosystem and not regulation. Haniffa, Hudaib, and Nawaz have clearly demonstrated that the success of SPACs depends heavily on the sponsors’ reputation and credibility. Since SPACs possess no operational business and no tangible assets beyond their IPO proceeds, investors cannot assess the value of a SPAC offering on conventional financial criteria, which is precisely why the sponsors’ social capital determines whether a SPAC succeeds. The fact that a target company remains unidentified at the stage of raising funds further compounds the problems that investors face in valuing their offering. Thus, the sponsors’ ability to exploit their structural, relational, and cognitive social capital to receive a higher valuation than a traditional IPO is not peripheral to the SPAC model but is determinative of it.

The Pershing Square Tontine Holdings Ltd. (‘PSTH’) illustrates their argument.  The PSTH was a SPAC that was floated by Bill Ackman and offered 200 million units at $20 a share and planned to raise $3 billion. The IPO was well perceived by the market, resulting in a record $4 billion being raised, the most proceeds ever raised at that time. This outcome was possible precisely because Ackman had spent decades building structural capital through elite networks and relational capital through a sustained track record of delivering returns. His cognitive social capital, built through the ‘Harvard brand’ and subsequent reputation as a Wall Street hedge fund manager, aided in generating such institutional demand.

On the other hand, GIFT City’s IFSC exchanges, NSE IFSC and India INX, both of which commenced trading only in 2017, possess none of the accumulated ecosystem that well-established stock exchanges like NASDAQ possess. There is no resident population of serial SPAC sponsors with the reputational depth that is required. To add to this problem, there is no institutional investor base of the kind the PSTH drew upon. The IFSCA’s own eligibility conditions, requiring sponsors to have a “good track record in SPAC transactions or fund management or merchant banking activities” and making the disclosure mandatory in the offer document, presuppose exactly the kind of reputational ecosystem whose absence makes the condition difficult to satisfy.  This allowance of SPAC has, in effect, been built for a sophisticated market without yet building one.

GIFT City as a Foreign Jurisdiction

The second problem follows from the first and compounds it. Since GIFT City operates within a Special Economic Zone that is treated as a foreign jurisdiction for Indian exchange control purposes, any de-SPAC merger involving an Indian target company would require compliance with the Foreign Exchange Management (Cross-Border Merger) Regulations, 2018 and FEMA (Overseas Investment) Regulations, 2022, along with obtaining prior approval from the Reserve Bank of India under section 234 of the Companies Act.  This necessarily means that a SPAC listing in GIFT City does not, in practice, escape the regulatory burden that is currently present when Indian companies want to get listed on NASDAQ. This merely relocates the burden to a thinner and less liquid market.

A sophisticated Indian target company, particularly one backed by institutional investors who have already navigated overseas SPAC transactions, will rationally ask why it should accept GIFT City’s thinner investor depth and weaker liquidity when compliance costs are equivalent to a NASDAQ route that offers materially superior market access. The answer, based on the current state of the market, is that there is no compelling reason to prefer GIFT City.

Further, in a comprehensive empirical study of 531 completed SPAC acquisitions in the USA between 2015 and 2022, it was shown that domestic SPACs significantly outperform foreign ones across every performance metric, including average IPO proceeds raised, PIPE funding, and investor confidence. The authors attribute these disadvantages directly to foreign SPACs’ network deficits in the US market. GIFT City, though located in India, is treated as a foreign jurisdiction for exchange control-related purposes. Therefore, the same problems will inevitably arise. 

Recommendations

Given the above analysis, the most consequential reform available to Indian regulators is the introduction of a dedicated, SEBI-notified domestic SPAC Framework permitting listings on the NSE and BSE. This would require targeted amendments to address the structural incompatibilities identified. Further, SPAC-specific rights and regulations which have no analogue in Indian company law would have to be legislated expressly. SEBI has not been entirely silent on this question. It formed an expert committee to assess the viability of allowing SPACs in the domestic atmosphere.  Five years on, no regulation has emerged, and the consultation appears to have lost momentum. It may, for practical reasons, have been shelved. SEBI’s hesitancy is not without justification. SPACs operate on public funds raised from investors who, unlike in a conventional IPO, are being asked to trust a blank-cheque company with no operating business, no identified target, and no tangible assets beyond cash held in a trust. This sits uneasily with the foundational principles of Indian securities regulation. This is further compounded by the potential of SPACs being used for fraudulent purposes, given the previous history of fraudulent activities involving SPACs in the US. However, the appropriate regulatory response to a legitimate concern is not indefinite inaction but calibrated engagement.

The path forward requires genuine institutional engagement. SEBI should constitute a high-level expert committee and charge it with producing a concrete, implementable framework. The US provides the most instructive reference point. It should not be used as a model to replicate it wholly, but rather as a case study that India can benefit from. An initial framework restricted to qualified institutional buyers, with legislated sponsor lock-in periods and express statutory redemption rights, would address SEBI's core governance concerns while preserving the structure's commercial utility.

Creating a SEBI-notified framework will take a substantial amount of time before it becomes operational. In the interim, IFSCA should actively seek to generate the ecosystem conditions that are suitable for SPAC transactions. This necessarily entails moving beyond rule-drafting towards active market-making, which includes attracting anchor sponsors with established reputational capital to structure the first SPAC in GIFT City. The uniqueness and competitive advantage that SPACs offer to India's late-stage startup ecosystem will not wait indefinitely for regulatory consensus. A regulated domestic SPAC framework, however conservatively designed, is structurally preferable to the current system that does not allow SPACs to be listed at all.