Special Purpose Acquisition Companies (SPACs) and Their Regulatory Dilemmas in India

Introduction

Global capital markets have developed the concept of Special Purpose Acquisition Companies (SPACs), wherein unlike other companies, don’t have any operational activities (they are like a blank-check shell company) and are created for the purpose of raising money through an Initial Public Offering (IPO) to acquire an existing private company. For the target company, merging with or being acquired by a SPAC is an alternative path that management can take to access the public market and achieve liquidity for its shareholders instead of executing a traditional IPO. The SPACs operate by first raising money from the securities market and then acquiring a company using those funds, thus reversing the traditional IPO process and providing access to a direct route on a stock exchange. SPACs are not a new idea. They first appeared in the United States in the early 1990s as “blank check” companies, and became a popular way to go public^[1].

Before moving towards the complexity of SPAC structure, I want to make it clear that a SPAC is not a reverse merger. SPAC and reverse merger both help a private company become public without an IPO, but they work very differently. In a reverse merger, a private business merges into a company that is already listed, often an old operating company, and inherits its listing. That vehicle was built for the purpose and has no pool of cash waiting to be used, whereas a SPAC is a company created specifically to do a merger.

Let’s see why companies are choosing the SPAC model for going public rather than choosing a traditional IPO. It is very important to understand that a SPAC merger brings certain advantages, but it also has its own challenges. One of the greatest of these is finding the best-fit SPAC sponsor.

The main advantages of going public with a SPAC merger over an IPO are:

1. Faster execution than an IPO: A SPAC merger usually occurs in 3-6 months on average, while an IPO usually takes 12-18 months.^[2]
2. Upfront price discovery: The IPO price depends on the market conditions at the time of listing, whereas a SPAC merger allows the parties to negotiate the pricing before the transaction closes, which is more advantageous in a volatile market.
3. Ability to raise additional capital: SPAC sponsors will raise debt or PIPE (private investment in public equity) in addition to the original capital to fund the transaction but also to fuel growth for the combined company. This backstop debt and equity is intended to ensure a completed transaction even if some SPAC investors redeem their shares.
4. Operational know-how: SPAC sponsors are often experienced financial and industrial professionals. They can use their network of contacts to bring their management expertise to bear, or even sit on the board themselves.

But there are many risks of going public with a SPAC merger over an IPO, which are:

1. Shareholding dilution: SPAC sponsors usually own a 20% stake (that is standard range of shareholding) through founder shares, as well as they get warrants to purchase more shares. Each of these adds new shares, so everyone else’s percentage ownership shrinks (dilution). The result is that existing shareholders and the company end up owning a smaller slice than the headline deal terms suggest.
2. Compressed Timeline: The target company must have audited financials, SEC filings, investor relations, and internal controls completed much faster than in an IPO.
3. Less rigorous due diligence: SPAC transactions are less rigorously scrutinised than IPOs, which increases the chance of mistakes, overvaluation, restatements, or lawsuits.
4. No underwriter or comfort letter: In an IPO, underwriters check compliance and the accuracy of the disclosures. A SPAC is already public, so there is no underwriter doing this checking.^[3]

Why Does Indian Law Resist SPAC?

The Companies Act 2013 does not define a “shell company”. A parliamentary panel (the Standing Committee on Finance) pointed out in March 2018^[4] and asked the government to add a definition that separates companies guilty of deliberate fraud from those merely irregular with their statutory filings (such as dormant or defunct entities). This recommendation arose during the government’s massive crackdown, where lakhs of non-compliant firms were deregistered, sparking concerns that legitimate but inactive businesses were being unfairly penalized or mislabeled without due process.

SPAC (which may initially have no operating business) is not automatically prohibited under the Companies Act 2013, but it may still have to comply with laws that were primarily designed to regulate and prevent misuse of inactive or shell-like companies.

Striking off under Section 248

Section 248 of the Companies Act 2013 allows the Registrar to strike a company off the register if it has not commenced business within one year of incorporation, or has carried on no business or operation for two financial years without applying for dormant status. A SPAC may spend 24 to 36 months doing nothing but searching, and whether searching is ‘business’ is unclear. A struck-off company can ask the NCLT for restoration, but only by showing it was carrying on business at the time or that restoration is unjust.

That said, strike-off is not automatic. The Registrar must first have ‘reasonable cause to believe’ that the company is not doing the business. The Registrar must send a notice to the company and its directors and then give 30 days to reply before removing the name as per Sections 248(1) and 248(5).

A SPAC that is actively searching for a target, holds its money in a bank account, and files its returns on time can show this from its records. So, Section 248 is a real risk, because no one has yet tested whether ‘searching for a target’ counts as business. But it is not the biggest barrier as compared to SEBI’s rules. The Company Law Committee agreed in 2022^[5] and recommended relaxing the striking-off rules for SPAC. The Committee recommended that the Act recognize SPAC transactions and include enabling provisions under the Companies Act. To be precise, the Committee recommended two things:

1. an enabling provision in the Companies Act to recognize SPACs, so that a SPAC incorporated in India can list on an Indian exchange;
2. relaxing the rule that a company must carry on business to avoid being struck off.

Dormant status is not a workaround

It is tempting to park a SPAC under Section 455, which gives ‘dormant’ status to a company formed for a future project or to hold assets, basically to a currently inactive company. However, the dormant-company framework may not be suitable for a conventional SPAC for two principal reasons. A dormant company can have no ‘significant accounting transaction’, and only minor housekeeping items (like Registrar’s fees and office upkeep) are excluded^[6]. So, raising money through an IPO and filling a trust account is exactly the opposite. Next, the Companies (Miscellaneous) Rules, 2014 bar any company whose securities are listed on a stock exchange in India or abroad from filing for the ‘dormant’ status, so a listed SPAC is ineligible to become dormant. Dormancy lightens compliance for an entity sitting out the market. A SPAC asks the public for money and owes them more disclosure, not less.

Listing eligibility under SEBI’s rules

SEBI’s Issue of Capital and Disclosure Requirements (ICDR), 2018 closes the remaining door. Under Regulation 6(1)(a) to 6(1)(d) of the ICDR, 2018^[7], a standard IPO needs net tangible assets of Rs. 3 crore, operating profit of at least Rs. 15 crore, and net worth of at least Rs. 1 crore over the prescribed lookback periods.

The Rs. 15 crore is an average operating profit over three preceding years, with a profit in each year. The net tangible assets test adds another problem: not more than 50% of those assets can be held in cash or other monetary assets. A SPAC’s only asset is cash, so it fails this test by its very nature^[8].

Although a SPAC may seek listing under the alternate eligibility norms, it would have to comply with Regulation 32, read with Regulation 6(2). Accordingly, the SPAC must ensure that no more than 10% of the net offer is allocated to retail individual investors and not more than 15% to a non-institutional investor. Consequently, at least 75% of the net offer would be required to be allocated to qualified institutional buyers (QIBs).

Even if a SPAC clears the eligibility test under Regulation 6(2), a second rule stops it. In January 2022, SEBI amended Regulation 7 of the Issue of Capital and Disclosure Requirements. Money raised for acquisitions where the target has not been identified (Blind pool Acquisition) now cannot exceed 25% of the issue size, and that amount, together with money for ‘general corporate purposes’, cannot exceed 35%. These limits fall away only when the target is named in the draft and final offer documents^[9]. This hits SPACs at the root, as a SPAC by definition does not know its target at the time of its IPO; if it did, it would simply be an ordinary company making an acquisition. So, the one purpose a SPAC exists for is the purpose SEBI’s rules restrict the most.

GIFT City: The IFSCA Framework

India’s one working answer for SPAC sits in GIFT City, the International Financial Services Centre (IFSC) in Gujarat. Presently, there is only one IFSC in India, i.e., GIFT City at Gandhinagar, Gujarat. It provides that for SPAC listing, the SPAC must raise at least USD 50 million. Minimum sponsor contribution is prescribed to be at least 15% to 20% of the post-issue paid-up capital, and the minimum application size in an IPO of SPAC is kept at USD 100,000.^[10]

The GIFT City rules also contain the investor protections a SPAC needs. The IPO money must be kept in an interest-bearing escrow account controlled by an independent custodian. The deal must be approved by a majority of shareholders other than the sponsors, and shareholders who vote against it can redeem their shares for their share of the escrow money. If no deal is completed within the time stated in the offer document (at most 36 months from listing), the escrow is liquidated, the shares are delisted, and sponsors get nothing from the escrow. In other words, GIFT City has already written the safeguards that domestic law lacks.^[11]

While SPAC listing at the IFSC is a welcome step, it needs to be remembered that GIFT City IFSC is in a preliminary development stage and not an established platform for fundraising.

Foreign exchange law also matters. Under Regulation 3 of the Foreign Exchange Management (International Financial Services Centre) Regulations 2015, a financial institution set up in an IFSC is treated as a person resident outside India, so when a GIFT City SPAC buys an Indian operating company, the deal is cross-border, with the approvals that follow.

Regulation 3 speaks of a ‘financial institution’ set up in an IFSC, and it is not settled that a SPAC, a shell waiting to buy a business, is a financial institution at all. Further, an issue arises that if the GIFT City route is used, then Rule 19(3) of the Foreign Exchange Management (Overseas Investment) Rules, 2022 says that when such a foreign entity invests in India, the structure must not have more than two layers of subsidiaries. If Indian sponsors set up a GIFT City SPAC, then buy an Indian company with its own subsidiaries, the layer count must be checked carefully.^[12]

The Comparison Angle

In the United States, where SPACs began, regulations have become stricter. The SEC’s 2024 SPAC Rules (Release No. 33-11265)^[13] demand full disclosure about sponsor pay, conflicts, and dilution, make the target a co-registrant, and treat SPAC deals as a sale of securities to the shell’s shareholders^[14].

Singapore was first in Asia: Singapore Exchange’s (SGX) SPAC framework requires a minimum capitalization of $ 150 million and mandates that at least 90% of gross IPO proceeds be placed in an independent escrow account.^[15]

Hong Kong followed on 1st January 2022 with a tighter model. Until a deal closes, only professional investors may subscribe for, or trade SPAC securities; a SPAC must raise at least HK$1 billion; promoter shares are capped at 20% of shares in issue; and a deal must be announced within 24 months and completed within 36, each extendable by six months with approval.^[16]

This shows the choice India should make: rely more on disclosure, as Singapore did, or confine the product to investors who can absorb the risk, as Hong Kong did.

Critical Analysis

The major gaps stand out. First, nobody owns the problem. The Ministry of Corporate Affairs controls the Companies Act, SEBI controls domestic listing, the RBI controls exchange control, and IFSCA controls GIFT City. The Company Law Committee in 2022 recommended certain suggestions regarding SPACs, but no domestic framework exists yet.

Second, the GIFT City design fits awkwardly with the Companies Act and especially against Section 248 of the Companies Act, 2013. The law should say how the two fit. It should also settle the status of a SPAC under Regulation 3 of the FEMA IFSC Regulations, 2015, which speaks of financial institutions; whether a SPAC is one is not obvious.

Third, there is no visible use. GIFT City’s market is very young: its first IPO opened only in March 2026, and direct listing of Indian companies there has been allowed only since January 2024. As far as public reporting shows, no SPAC has listed under the framework.^[17]

India has not banned SPACs. It has never built a home for them, either. Company law treats a shell as a suspect; Section 248 punishes waiting; dormant status is closed to listed companies; SEBI’s profit-based tests rule out a company with no history, and GIFT City offers a narrow, costly way to stay.

It is really important to carve out SPACs from Sections 248 and 455 of the Companies Act 2013, building on the Company Committee’s 2022 proposal to relax the strike-off rules for SPACs. A SPAC is meant for target companies, and the current law leaves it exposed to strike-off and offers no suitable dormancy status. The carve-out should come with safeguards (a fixed deadline to complete a deal and return of funds if it fails) so it cannot become a loophole for shells.