Is the year 2021 going to be the year of the Special Purpose Acquisition Company (SPACs)? Recent market trends in the U.S. and elsewhere seem to suggest so. Why are SPACs becoming so popular—and how will they perform in the Indian market? We shall answer these questions and much more in the following sections.
This article covers:
- What is SPAC?
- How do SPACs work?
- Examples of SPAC deals
- Why are SPACs becoming so popular?
- Advantages of SPACs over IPOs
- Risks of SPACs
- Challenges for SPACs in India
What is SPAC?
Also known as blank check companies, SPACs are essentially publicly traded companies set up to raise capital from the market or acquire another private company. Compared to an initial public offering (IPO), a SPAC is a less complicated way for a private company to go public.
A SPAC does not even have any business or commercial operations—neither does it make any products or offer any services. That is the reason they are also referred to as shell companies.
How do SPACs work?
As the name suggests, a special purpose acquisition company is primarily set up by investors or sponsors to acquire another company in a particular industry segment. When creating the SPAC, the stakeholders must have at least one company on its acquisition list but should not disclose their target companies during the entire process.
Once the SPAC is formed, it practically goes through the normal IPO process. Here, the only difference is the IPO investors have no idea about which company they are investing into. This is the reason why SPACs are also called blank check companies. The capital or money raised by the SPAC IPO is invested into an interest-earning account and can be used only for company acquisition or to be returned to the investors.
The newly formed SPAC has a maximum of 2 yrs to complete a SPAC merger or acquisition. If this deal is not completed for some reason, the collected money is returned to the investors along with the earned interest. Suppose the acquisition or merger deal is completed within 2 yrs, the target company is announced and approved by all stakeholders and investors, and the new SPAC is listed as a public company on the stock exchange.
Examples of SPAC deals
Here are some examples of successful SPAC deals in India:
- ReNew Power, India’s largest renewable energy company, was listed on Nasdaq – following a merger agreement with US-based SPAC, RMG Acquisition Corporation
- The online travel company, Yatra.com entered into a SPAC merger agreement with Terrapin 3 Acquisition Corp, a U.S.-based SPAC
- India’s DTH company, Videocon D2H signed a SPAC deal with U.S. blank cheque company, Silver Eagle Acquisition Corp
- Online grocery store, Grofers is also expecting to raise capital through a SPAC agreement with a New York-based SPAC
Why are SPACs becoming so popular?
SPACs are no longer a new entity and have been in existence for many decades now. So, why has it become so popular recently? On the whole, private companies and entrepreneurs who wish to go public follow the SPAC route instead of the “traditional” IPO route. Add to that, and the COVID-19 pandemic also created market uncertainty for companies that have raised funds through venture capitals but cannot go ahead with their IPO plans.
Advantages of SPACs over IPOs
Here are some positives of SPACs over traditional IPOs:
- Shorter timeline of three to four mth as compared to an average of one yr for IPOs
- Lesser risk as SPAC investors can redeem their investments by selling their shares at the IPO price or the assurance of recovering their investment in two yrs maximum, even if the SPAC merger or acquisition does not happen
- Good returns for early investors who invest in promising private companies that have good future potential
- Faster mode for any private company to raise the capital required to go public when compared to a conventional IPO
Risks of SPACs
Here are a few risk factors associated with SPACs:
- SPAC investors, who are hoping to earn good returns from a merger or acquisition deal, may not even see a good agreement being executed in two years. For instance, of the 248 SPACs created in 2020, 138 are still looking for target companies
- Higher risks as investors put their complete faith into SPAC sponsors in finding the right private company
- Higher market uncertainty of investing in a shell company without any product or business operations
Challenges for SPACs in India
Despite its growing popularity in the U.S. and global market, SPACs face many regulatory challenges in the Indian market. Nevertheless, following the ReNew Power deal, SPACs have been in the news in India.
India’s current regulatory framework does not support the creation of SPACs or blank check companies. For example, according to the 2013 Companies Act, the Registrar of Companies can remove any registered company that does not start its operations within a year making it infeasible for the SPAC mode.
Additionally, the Securities & Exchange Board of India (SEBI) requires the private company to declare its tangible assets and operating profits for the last three to five years before becoming eligible for an IPO or public offering.
However, the growing size and potential of the Indian IPO market do offer a good destination for the success of SPACs. Among the recent developments, the SEBI has created a team of experts looking to study the potential and feasibility of allowing SPACs to operate in the Indian market. India’s regulatory framework will have to undergo significant changes to make SPACs favorable for Indian investors.