Showing posts with label Corporate Law. Show all posts
Showing posts with label Corporate Law. Show all posts


On 11th March 2021, two government regulators – Capital and domestic market regulator and watchdog SEBI, and the counterpart for Fintech hub GIFT City of Gujarat, the International Financial Services Centres Authority (IFSCA) are on the board in order to facilitate the launching of Special Purpose Acquisition Companies (SPACs) in India.
Wall Street’s hottest trends have come down to India penetrating into the systems of the country. Former unicorn, WeWork decided to go out in public when in 2019 its IPO faced implosion dramatically as the co-founder’s management came under shrewd scrutiny. The start-up is considering using a Special Purpose Acquisition Company to go public. Other companies like Virgin Galactic, DraftKings, Opendoor, and Nikola Motor Co., did go public by merging themselves with SPACs. According to Renaissance Capital[1], roughly 200 SPACs went public in the year 2020, which raised the funding of about $ 64 Billion. This amount is equal to all of 2019’s IPOs combined. Cushman & Wakefield is the latest real estate firm jumping on the blank check bandwagon by launching a $250 M SPAC. 2021, Bill Gates-backed start-up Butterfly Network (Ultrasound (Value: $1.5 Billion)) and 23andMe (DNA Testing), is on a deal worth $4 Billion to go public.

Special Purpose Acquisition Company

It is essentially a shell company that is set up or established by the investors with the sole purpose of raising money/fund through an IPO to eventually acquire another company. As the sole purpose is raising funds, they have no business or assets, except raising funds. The proceeds are used to merge with or acquire over a private operating company.

When SPAC raises money, the people or investors buying into the IPO are not aware of what the ensuing acquisition company would be. SPACs are also known as “Blank Cheque companies” for the same reason.

SPACs are done by selling either shares and warrants, which are investment securities that aid the investors to purchase more shares at a later point of time at a fixed rate. These raised funds would be stored in trust until one of the following conditions get complied:
1. SPAC management team reaches a company of interest. This company would be taken open in public through a procedure of acquisition along with the capital raised in the IPO.
2. They merge with a company
The deadline for complying with one of the conditions is two years.
In case of non-compliance on the part of the SPAC, it will be liquidated, with the money/funds getting returned to the investors. Investors who do not approve are given the option to redeem their SPAC shares.
The SPAC typically raises additional funds [e.g., through the PIPE (private investment in public equity) route] in advance of acquisition to address the risk of reduction in available funds caused by investor exits/redemption.

IFSCA has proposed an apposite framework for raising capital and listing SPAC on the recognized stock exchanges in International Financial Services Centres. The areas targeted are Environment, Social and Governance (ESG), fintech, corporate restructuring, etc. This would help in providing an ecosystem for capital raising and listing by Fintech and other start-up companies.

Offer size of not less than $50 Million or any other amount as may be specified by the authority from time to time. The sponsor shall hold at least 20% of the post-issue paid-up capital. The minimum application size in an initial public offer of SPAC shall be $250,000. The minimum subscription of at least 75% of the offered size. The corporate affairs ministry is pushing norms on the direct listing of the companies on foreign stock markets. Companies like ReNew Power have already announced their plans to use SPAC to raise funds.

Regulatory and Legislative Challenges

There is a doubt on whether retail investors could be allowed for investing in these structures of SPAC as it has high risks attached to it. Risks have to be safeguarded with a decision on the phase of their entry point in the thread. As this is the trend almost all start-ups can not achieve overnight success s, which could have the potential to bring in many investors for the IPO. As it is not a well-known entity, the same would not be successful.

The Companies Act, 2013 states that a company is required to commence business within one year of business. This is contradictory to the SPACs as it would not have a business for approximately of nearly 2 years. The regulatory concern of the stage at which retail participation should be allowed is present. To allow the listing of SPAC, which would be an initial non-operating company, the SEBI regulations also need amendment. Controlling post amalgamation change is concerned. An amendment might be a need to takeover regulations.

Advantages and Disadvantages

SPACs offer the advantage of investing along with sponsors in SPAC like private equity-type transactions to the public shareholders. It allows rapid deployment of capital to take advantage of opportunities. It also helps to beat the market instability or volatility in the conventional IPO markets which are for target companies that are acquired by SPACs.

In the US, there is a faster timeline to listing with no requirement for a lengthy book building process or intensive marketing. In the times of volatile markets ( with reference to Covid times ) higher certainty prevails in the availability of funds. It provides flexibility in deal pricing, deferred exits, earn-outs, and other deal-specific mechanisms in the business combination agreement.
The technology and ESG companies get access to an offshore exchange and sophisticated investors that understand the sectors which are relevant, in and out.

Challenges related to SPACs are that they have distinct trading cycles which are different from IPO. With SPACs, there are uncertainty risks attached which have to be dealt with like divergent interests of sponsors, investors, and the target company. In India, a merger through the scheme of arrangements is time-consuming. The same issue is faced with liquidation, and this is the reason it loses attractiveness over IPO.

The laws of India have been changed to offer cross border mergers, challenges, regulations, and taxation which restrict the parties to merge an Indian company with SPAC efficiently. The cross merger regulations have some compliances to be viewed in respect to outbound mergers. The compliance factors are as follows:

1. The need for National Company Law Tribunal approval. The assessment of the merger by all the applicable regulators. The NCLT approval for a merger of an operating company with an offshore shell firm could be untimely or delayed for several reasons, newness and lack of jurisprudence around.
2. The market value of the offshore shares acquired by Indian should be complying with limitations given by Indian exchange control rules, which is the low cap of $250,000/12 months).
3. The Indian merging company after the process, its offices will be the branches of the foreign company. There are limitations of activities permitted for the branch offices in India.

If the operating company is Indian, the two options for de-SPACing are
1. Indian Co. & SPAC’s merge
2. Indian Co. & SPAC’s swap of shares

Again, the above issues would arise which is it would become a subsidiary of the overseas SPAC. Any such activity would require compliance with India’s Corporate laws, FDI regulations, and overseas direct investment under the Foreign Exchange Management Act, 1999 with Liberalised Remittance Scheme Regulations. The restructuring would also require the approval of RBI and the concerned ministry.
Under the Indian Taxation laws, such outbound merger and swap of shares are taxable, with no specific relief or exemption available because of which next-generation businesses would suffer.

Tax Regime

The recommended one is similar to the framework for Real Estate Investment Trusts and Infrastructure Investment Trusts. At the time when unitholders exit, selling listed REIT or InvIT units, tax is levied and is deferred on the earlier swap of operating entity’s share with REIT or InvIT unit’s transaction. India could use a similar regime with a single-window regulatory tax framework for de-SPACing transactions.

With Wall Street, even the Dalal Street can board the ride for SPACs by considering a regime for India. Indian economy wishes to touch the $5 trillion mark, with startups playing a key role. SPACs are major opportunity offers to pull up its entrepreneurial sleeves by opening the floodgates for capital.
The SPACs have the potential to give new wings to the start up ecosystem.

[1] The 2021 outlook for the booming SPAC market and traditional IPOs (
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Author: Saptak Pandya, The Maharaja Sayajirao University of Baroda


An act known as the Foreign Exchange Management Act was formulated by the Central Government of India to promote international commerce and crosswise the borderline trade in India. In 1999, “the Foreign Exchange Management Act (FEMA) was”adopted to regenerate the previous FERA act. In order to fill all the gaps and drawbacks of the FERA (Foreign Exchange Control Act), FEMA was conceived and several economic reforms (major reforms) were then implemented under the FEMA Act. In order “to d-regularize and have a liberal economy“in India, “FEMA”was effectively introduced.


Ø “In the general” public “interest, the Government of India” may limit the execution of foreign exchange deals within the current account by an approved person.
Ø Without the approval of FEMA, all financial transactions relating to international securities or exchanges cannot be carried out. All transactions must be done by "Approved Persons."
Ø Empowers RBI to limit funds financial credit transactions “even if” they are “carried out” through “an” approved “individual”.
Ø It gives “the central government” powers to monitor “the flow of payments to and from” an entity located “outside the country”.
Ø In accordance with “this Act, Indians residing in India” are allowed to carry out overseas trade transactions, overseas safety dealings or the right to keep or own immovable property in a foreign country in the event that security, property or currency has been acquired or owned when the individual is residing outside the country or inherits the property from a person residing outside the country.


FEMA aims at facilitating global deals as well as expenses and at fostering the methodical growth and preservation of the overseas currency marketplace.[ii] The Act has allocated the Reserve Bank of India (RBI) an important role in FEMA’s management. The Reserve Bank of India shall, in consultation with the Central Government, lay down the laws, regulations, and standards pertaining to several parts of the legislation. This legislation allows the Central administration to designate as numerous Central Government Officers as Adjudicating Authorities to conduct investigations relating to the violation of the Act. The “appointment of one or more Special Directors (Appeals) to hear appeals against the orders of the adjudicating authorities” is often provided for. An Appellate Tribunal for Foreign Exchange will also be formed by the Central Government “to hear appeals against the orders of the Adjudicating Authorities and the Special Director (Appeals). FEMA provides” that a Director of Compliance shall be created by the Central Government “with a Director” and any “other officers or class of officers it” deems robust to take up the “investigation of the contraventions” referred to in “this Act”.


· Foreign Exchange Regulation Act (FERA), 1973

In India, in 1973,[iii] the Foreign Exchange Regulation Act (FERA) was a law that enforced strict restrictions on certain forms of payments, overseas trade transactions “(FOREX) and securities and transactions” that “had an indirect” effect “on foreign exchange and the import and export of” currencies. With this goal of controlling payments and foreign exchange, the bill was formulated.[iv] With impact from January 1, 1974, FERA came into force. “FERA was introduced at a time when” the country's “foreign exchange (FOREX) reserves were” poor and “FOREX was a scarce commodity”. Therefore, “FERA” continued with “the presumption that all foreign” exchanges received “by Indian” citizens were rightly owned by “the Government of India and had to be” obtained also handed over “to the Reserve Bank of India (RBI)”.

· Switch From FERA

FERA was unable to regulate practices such as the proliferation of Multinational Companies. The 1991-1993 compromises made to FERA revealed that FERA was on the threshold of being obsolete. It was agreed, after the 1993 amendment to FERA, “the act would become FEMA. This was done in order to” ease “the foreign exchange” restrictions “in India”. In 1998, “FERA was” abolished “by Atal Bihari Vajpayee’s” government “and replaced by the Foreign Exchange Management Act, which liberalized foreign exchange controls and” foreign investment “restrictions”.

In the overseas exchange market, the purchase as well as the sale “of foreign currency and other debt instruments by” companies, “individuals and governments” takes place. Besides being very competitive, both in the world and in India, “this market is also the largest and most liquid market”. Changes and developments are continually underway, which can either be advantageous to a nation or subject it to higher risks. Foreign exchange market management is important “in order to” minimize as well as prevent the threats involved. “Central banks would work” for “an orderly functioning of transactions” that would enable their foreign exchange market to grow as well. Foreign Exchange Market The need for foreign exchange management is significant, whether under FERA or FEMA’s power. An appropriate “amount of foreign exchange” must be preserved.

FEMA served to make foreign trade dealings simpler along with RBI’s approval were no longer needed for transactions involving current accounts for external trade. Instead of controlling, the transactions in Foreign Exchange were to be 'regulated'. The transition to FEMA reflects the shift in terms of resources on the part of the government.


· Head Office of FEMA, also known as Enforcement Directorate, headed by the Director is located in New Delhi.
· There are 5 zonal offices in Delhi, Mumbai, Kolkata, Chennai, and Jalandhar, each office is headed by Deputy Director.
· Every 5 zones are further divided into 7 sub-zonal offices headed by Assistant Directors and 5 field units headed by Chief Enforcement Officers.


“FERA was to regulate everything that was” listed for overseas trade, while “FEMA” provided “that” 'anything “other than what is” clearly protected “is not” regulated.' FERA's overarching goal “was to” control “and minimize foreign” currency “and securities” transactions, “while FEMA, on the other hand”, sought “to” help establish “a liberal foreign exchange market in India. This” variation “in” language “reflects” the government's “seriousness” with respect to “foreign exchange” deregulation “and” the “promotion of” the “free flow of international trade”.

“Section 5 of the Act” eliminates limits “on” the “withdrawal of foreign” currencies “for the” purposes “of current account transactions” in order to encourage external trade. Since foreign “trade, i.e. imports” / exports “of goods & services”, requires current account “transactions, there is no need” to obtain “RBI” permits “in” connection “with” external trade “remittances”.


Ø Free current account purchases, subject to fair limitations which may be imposed.
Ø “FEMA is” a “regulatory mechanism that” allows the “RBI and” the “central government to pass” foreign exchange “regulations and rules” in line with India's foreign trade policy.
Ø Without any prior permission from RBI, “any person” can “sell or” withdraw “foreign exchange and” can “then” notify RBI later.
Ø “FEMA is more concerned with” leadership “than” with “regulations or” controls.
Ø Dealing in foreign exchange through licensed individuals such as registered dealers or money changers, etc.[v]
Ø The Capital Account convertibility possibility was recognized by FEMA.


“The Foreign Exchange Management Act” ("FEMA") envisages “a” central role for “the Reserve Bank of India” ("RBI") in foreign exchange management. Under FEMA, the major RBI roles are as follows:

(A) Control of “foreign exchange” transactions “by” granting “general or special permission for foreign exchange” transactions, “excluding cases where specific provisions have been made in” the “Act, Rules or Regulations, Section 3”.

B) “RBI cannot” place “any” limits “on” transactions in the “current account”. In consultation with RBI-Section 5, these can only be imposed by the Central Government.

C) Defining payment terms for capital account transactions, Section 6(2).

D) By issuing Rules, regulate / prohibit / restrict:

· Shift or question of Resident Foreign Security and Non-Resident Indian Security;
· Loans and loans “in foreign” currencies “or to a foreign person”;
· Currency “export/import” or “currency notes”;
· Immovable property “transfer outside India”;
· “Giving” guarantees “or” guarantees in the case of foreign exchange transactions- “Section 6(3)”.


“FEMA” allows “only authorized” foreign exchange dealers or foreign security dealers. Under the Act, such “an authorized” individual “means an authorized dealer”, a “money changer”, an “off-shore banking unit, or any other person” authorized by “the” Reserve Bank for the time being. The Act thus “prohibits any person” not being “an” authorized “person from dealing in or transferring any foreign exchange or foreign security to any person”. Make “any payment” in any way “to or for the” loan “of any” individual “resident outside India”. Otherwise, obtain “any” payment by order “or on behalf of” any “person residing outside India” in any manner “through an” approved “person”.
“Enter into any financial transaction in India as” compensation “for or in association with acquisition or” development “or transfer of a right to acquire, any asset outside India by any” individual “is resident in India which acquires, hold, own, possess or transfer any foreign exchange, foreign security or any immovable property situated outside India”.

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Author: Riya

Corporate Governance and Its Importance

A total mix of a system of rules, policies, practices, and processes that direct and control a business’s behaviour is what we call Corporate Governance. It includes the framework that establishes a relationship between shareholders, management, the Board of Directors, and other important stakeholders[1]

Good corporate governance promotes a culture of integrity and can provide a business with a competitive advantage. It signals that an organizations interest in management is aligned with other stakeholders.

Mandatory v. Voluntary Corporate Governance

In Mandatory governance, if a firm fails to comply with the legal principle, penalties are imposed. In Voluntary governance, a firm adopts its corporate governance standards in the absence of any such imposed legal requirement. However, corporate governance reforms, policies and standards are additions to a legal regime that is already mandatory in nature and place[2].
a) Minimum Standards – In Mandatory structure, the state establishes the legal structure and minimum standards to which the firms must adhere. In this, the state can achieve its goals directly as the market participants will be compelled to comply since they do not want to face any punishment. Thus, there is a formation of healthy capital markets as regimes are formed with strong investor protection.
Whereas in Voluntary Legislation there is no guarantee that the minimum standards set by the state will be achieved.
A mandatory governance regime helps the state in developing sustainable capital markets as well as safeguarding interests of investors.

b) Compliance Levels – Compliance will be generally high if the penalties for the same are burdensome. There is a level of consistency if there has been a regime in place for the market participants for several years. In a mandatory regime, the rates of compliance over time are both consistent and predictable. And they achieve their objective more directly.

In Voluntary regime, compliances are on a weaker side. If the State establishes certain compliance to be followed, there is no assurance that market participants will abide by them, since there are no penalties attached to those who fail to comply. But voluntary can encourage compliance in the long run. As more and more market participants adopt such voluntary regimes, they become the norm among most participants and is called the ‘snowball’ or ‘cluster’ effect.

c) Cost to Investors – Mandatory rules as mentioned in the Corporate law are intended to protect the investors. The rules act as a shield for these investors against the undisclosed information. The firm’s governance practices strength is easily assessed thereby safeguarding a rational investor. Thus, this helps the investor in assessing potential investments and the rules embodied in that mandatory regime.
Under the Voluntary system, market participants are free to set their terms of reference. The cost of becoming an informed investor in such a system varies by a huge margin as it is difficult for investors to assess the relative strength of a firms governance practices and also the practices followed by other firms are different. Also, it is less certain that a firm is indeed complying with the guidelines.

d) Cost to the State and Firms – In Mandatory structure, the state will bear policy design costs, implementation, and enforcement costs. In addition to this, costs to firms arise from assessing their internal practices, implementing new governance structures, etc. There may also be some hidden costs associated with this regime.

Not all these costs exist under a voluntary regime. There are two costs which will be reduced under this system. First are the issuer’s compliance costs which are further divided into direct and indirect compliance costs. These costs generally do not arise since the firms decide which costs they wish to incur and when. Second, are the state’s enforcement costs and these can be significant. However, these costs will not be as high as there is no requirement for implementing governance policies as there is no corresponding legal action to the non-compliance of the same.
Because of reduced compliance costs, the costs involved in a voluntary system are lesser than that of the mandatory system

e) Flexibility – Mandatory regimes are inflexible in nature. The state establishes both the objective to be achieved by a firm and also the means to achieve the same.
As capital markets are populated by market participants of different sizes and types thus in a voluntary regime there is flexibility for issuers. Thus, flexibility in corporate governance regime is majorly important for both regulators and firms.

Corporate Governance: Regulatory Framework

The Corporate Governance structure for Indian companies is mentioned in the following[3]:

1. The Companies Act, 2013 – It consists of provisions revolving around board meetings, audit committees, general meetings, party transactions, the constitution of the board, etc.
2. Guidelines listed by the SEBI – SEBI issues regulations, rules, and guidelines to companies to ensure the protection of the investors.
3. Standard Listing Agreement of Stock Exchanges – This includes the companies whose shares are listed on different stock exchanges.
4. Accounting Standards issued by ICAI – ICAI issues accounting standards relating to the disclosure of financial information. Thus, the information contained in the financial statements must comply with the accounting standards.
5. Secretarial Standards issued by ICSI – ICSI issues secretarial standards relating to the New Companies Act. The same is to be followed by registered companies.


In a voluntary regime system, the first year may see a few firms complying with the voluntary code. Over time, more and more firms may comply thereby increasing the compliance and can continue to do so thereafter. The clustering effect is a market apparatus that can occur without the presence of legal rules. Thus, an optimal regulatory framework/regime takes care of the benefits and costs of all stakeholders and investors.