New audit rulebook for SPACs in offing: Govt may legalise, allow listing

The draft Bill to amend the Companies Act is expected to be ready by the second quarter of the current fiscal year

The government is considering to prescribe a reporting and audit mechanism for Special Purpose Acquisition Companies (SPACs) as it looks to legalise them and allow their listing on stock exchanges, according to officials at the Ministry of Corporate Affairs (MCA).

This follows several rounds of consultations and stakeholders' suggestions that the MCA has received on the fresh set of amendments to the Companies Act, particularly on the regulatory framework of SPACs and fractional shares.

Some recommendations, such as setting a minimum and maximum threshold post-issue paid-up capital for sponsors, could be also deliberated, according to the officials.

An SPAC is a company that does not have an operating business and is formed to acquire a target company. This allows such a shell firm to raise capital through listing, without having any operating business. Following listing, an SPAC acquires or merge into the target company. Currently, the Companies Act does not support SPAC structures as it mandatorily requires a company to be incorporated with a business object.

In its Companies Law Committee report 2022, the ministry proposed to introduce the SPAC concept and give these entities legal status, as well as permitting their listing on stock exchanges in India and abroad, among other proposals. The move shall pave the way for new-age firms to list abroad and attract capital.

The ministry had sought stakeholder’s comments by May 15 on the report and learnt to have received over 200 suggestions.

Some of these suggestions have raised risk factors with SPACs, as typically such instruments do not share the information on the target company. Besides, other than funds they raise, they do not have any assets, according to the people in the know.

“The ministry’s policy team is examining all the comments it has received and will soon start dialogues with regulators, including the Securities and Exchange Board of India, the International Financial Services Centres Authority, and the tax department, to address several regulatory and tax issues for companies and investors,” a senior official told Business Standard.

According to him, the draft amendment to the Companies Act will be prepared after taking all the suggestions and discussions into account, in order to be in sync with other rules in the case of SPACs. The draft Bill is expected to be ready by the second quarter of the current fiscal year, the official said.

Notably, the IFSCA has recently prescribed guidelines for SPACs; Sebi, too, is working on the rules for them.

In the case of fractional shares, most stakeholders seek taxation clarity on fractional entitlements.

The ministry proposed to introduce the framework for fractional shares, which, by concept, allows investors to put in a fixed amount to buy part of that particular stock.

The proposal, if approved, will pave the way for small investors to invest in high-flying stocks. And in return, the investor shall get all benefits proportionally, if the stock rises. Currently, Indian laws do not allow it.

According to the sources, tax authorities want clarity while dealing with fractional entitlements, such as Esops, especially in connection with start-up companies. The framework on this shall clear the air, another official said.

The ministry is also looking to tighten the audit framework and strengthen the National Financial Reporting Authority, by giving more power to act against auditor lapses and company executives.

“The law requires auditors to give an opportunity to the board of the company to explain its reasons but generally auditors are just going ahead reporting fraud. This violation must be strictly dealt with. Another area is with respect to stating reasons for the resignation of auditors,” said Lalit Kumar, partner, J Sagar Associates.

The current practice allows auditors to resign without owing any explanation to stakeholders. Therefore, relatively detailed disclosures before the resignation are the need of the hour, Kumar added.

The Company Law Committee was constituted by the corporate affairs ministry to make recommendations on changes aimed at facilitating and promoting greater ease of doing business, as well as ensuring effective implementation of the Companies Act, 2013, and the Limited Liability Partnership Act, 2008.

Apart from this, the ministry is expected to introduce two Bills— Competition Bill and Insolvency and Bankruptcy Bill for the upcoming Monsoon session of Parliament.