What is a SPAC?
A Special Purpose Acquisition Company or SPAC is a shell company formed to raise capital via an Initial Public Offer (IPO) with the sole purpose of using the funds to acquire another company (target company). At the time of IPO, investors are not aware of the target company to be acquired by the SPAC. This is why SPACs are popularly known as ‘Blank cheque companies’.
Key features of a SPAC:
- A SPAC does not have any other commercial operation
- SPACs are typically led by a group of institutional investors
- SPACs are supposed to identify a target company within two years of the IPO
- Failing to do so, the SPAC will have to return the IPO proceeds back to the investors with interest
- After acquisition, the unlisted target company gets listed automatically
- Faster access to capital compared to a traditional IPO
- Automatic listing on bourses
- Much less regulations, legwork and costs
- Limited focus on their past performance
- Possibility of higher valuations (based on projected earnings and not historical earnings)
What’s in it for the retail investors?
- An opportunity to participate in growth story of good quality start-ups
- Presence of experienced, expert institutional investors providing reassurance
- Investor money is safe in a trust and is invested in US treasuries until the acquisition
What are the key risks?
- Significant capital chasing very few good quality target companies
- Unrealistic valuations
Can we expect SPACs in India soon?
Not quite. This is because in their current format, SPACs don’t comply with several Indian laws. These include Companies act requirement that a listed company commence operations within a year, norms around control of a company post amalgamation, eligibility criteria for public listing (around net tangible assets, operating profits, among others) and so on. There are tax implications as well which will have to be considered to facilitate SPACs in India.
SEBI has asked its Primary Market Advisory Committee (PMAC) to examine the feasibility of SPACs in India and suggest regulations required to successfully introduce the SPAC route here. Thus, it may take some time for SPACs to become a reality in India. Meanwhile, startups continue to look in foreign lands to raise capital via SPACs.