LAHORE: The Securities and Exchange Commission of Pakistan (SECP) has proposed changes to the Public Offering Regulations to explore the concept of ‘special purpose acquisition company’ (SPAC) to provide a viable and sustainable ecosystem and more conducive regulatory environment for capital formation in the country through primary market.

The draft of the proposed amendments has been posted by the regulator on its website to seek public comments on the suggested changes.

SPAC is a new concept for Pakistan’s capital market but is prevalent in many countries, including the US, Canada, Malaysia, etc. Under the SPAC structure, a company comprising a group of persons or professionals raises funds from the public to use them for the purpose of mergers or acquisitions within a permitted time-frame, according to the SECP announcement.

“A SPAC’s life begins with its initial formation in the form of a company, followed by its IPO, its search for a target, a shareholder approval for merger/acquisition and finally, the close of an acquisition or else return of the SPAC’s proceeds back to its investors,” the regulator stated.

Under the proposed regulatory framework, SPAC will be a company or body corporate registered with the SECP, which will be formed by a group of persons meeting the fit and proper criteria. The paid-up capital requirements for SPAC will be Rs1 million and it may raise at least Rs200 million through its public offering.

The acquisition/merger has to be completed within the permitted time frame of two years. At least 90pc of funds raised by a SPAC will be kept in an Escrow Account managed by a custodian, an investment agent, bank or DFI engaged in regulated activities not being an associate of the SPAC appointed for securing the money of investors. The proceeds in the Escrow Account may be invested in permitted investments (in government securities, mutual funds, money market instruments and securities with investment grade ratings). Each merger or acquisition transaction will have to be approved by the shareholders by way of special resolution. Upon merger, the merged entity is automatically listed and in case of acquisition the SPAC will list the acquired entity.

The shareholders disapproving the merger or acquisition will be entitled for refund of their money from the Escrow Account as per a specified procedure.

Commenting on the development, Aftab Ahmad Chaudhry, former managing director of the Lahore and Islamabad stock exchanges before their merger into PSX, said the launch of SPAC regulations in Pakistan is nothing less than revolutionary. “It will unleash a process mergers and acquisitions of small and mid-sized growth companies in the country as previously the merger and acquisition activity was considered synonymous with large or big companies.”

Aftab, who is currently doing equity capital mobilization transaction advisory work and is involved in a number of mid-scale market acquisition, was of the view that the formation of SPACs will boost the opportunities for the specialized fundraising advisors to spot small and mid-sized companies in need of finance and then raise finance through market opportunities provided by SPAC regulations.

“The SPAC regulations are nothing less than an innovation in the public offering framework. In nutshell, SPACs have the potential of shifting the focus of fund seeking companies away from the banks to the capital markets without having to go through the onerous of listing themselves.”

Aftab, who had earlier also worked on the introduction of Growth Enterprise Market (GEM) concept while working for a multilateral donor-funded Financial Market Development Project after the merger of three exchanges, said in spite of the launch of GEM regulations in 2018 not a single company has yet listed on the GEM counter owing to the lack of sufficient efforts by PSX.

“The SPAC expands the financial inclusion in a market whereby special fund advisors raise the funds and the growth companies needing funds continue to focus on their business. SPACs enable both sides to be connected through corporate merger/restructuring schemes,” he concluded.

Published in Dawn, April 29th, 2021