Proposal to exempt SPACs from 'shell company' tag

The corporate affairs ministry has proposed to exempt special purpose acquisition vehicles (SPACs) from the 'shell company' provisions. In its 'Company Law Committee Report 2022', the ministry proposed to give legal status to SPAC entities and exempt them from the requirement applicable to companies regarding business operations.

Under Companies Act, every company needs to carry out business after incorporation, failing which the name of the company will be struck off. This rule is aimed at curbing the creation of shell companies which do not undertake any business but are used as a front for illegal activities.

However, SPACs are essentially blank cheque companies which don't have any intrinsic business of their own. They raise money from investors and list on stock exchanges. After this, they look for acquisition opportunities within 18 months. Usually, they buy an existing company and merge it into the SPAC. This benefits the company being acquired since it helps them list on stock exchanges without having to float a public share sale.


"The relaxation will enable companies to be set up as SPACs," said Moin Ladha, partner, Khaitan & Co. "This coupled exit opportunity for dissenting shareholders of a SPAC is a welcome step towards facilitating these transactions," he added.

The proposal comes as other regulators in the country are also working on special rules for SPACs. For instance, International Financial Services Centre Authority (IFSCA), which regulates the entities based out of Gift City, Gujarat, has already floated draft norms for SPACs. The Securities and Exchange Board of India (Sebi) is also said to be working on a SPAC framework.

Market participants said if the Company Law Committee's recommendations are accepted, entities wanting to create SPACs will get much-needed regulatory clarity.

"It is a progressive step that has potential to solve several regulatory and tax concerns for companies and investors," said Jatin Kalra, director, Grant Thornton. "The current regulatory environment does not permit SPACs - a concept that allows blank cheque companies to list on a stock exchange, and look for acquisition targets, allowing the target company to get listing status."