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Explained: What Are SPACs And Should It Be Introduced In India?

Ruchit Purohit Aug 07, 2021

What are SPACs and how do they operate?

A blank cheque company or a Special Purpose Acquisition Company (SPAC) is a popular route in the foreign markets to raise money via an Initial Public Offering (IPO). They then scout for new-age companies including start ups that need funds for expansion.

For example, recently a SPAC called the Stonebridge Acquisition Corp raised $200 million via an IPO in the United States and got listed at NASDAQ. StoneBridge Acquisition Corp is sponsored by GSS Infotech and aims to acquire its target in the next 12-16 months and has a special emphasis on Indian new-age tech companies with enterprise valuation of $1 billion to $1.5 billion.

A SPAC aims to acquire a target venture in maximum two years post fundraising. However, it is different from a traditional IPO as the SPACs, at the time of raising funds, do not commence operations or have any operations or revenue.

SPACs usually target private companies which are emerging/new-age companies that seek the market for growth.

Why SPAC? It is because the advisory and other fees for going public via SPACs are cheaper than the traditional IPO route. Early-stage companies can more easily comply with the requirements to merge with a SPAC rather than following the existing route, expert say.

A SPAC is usually a group of expert institutional investors who are hired to identify a target within a fixed time frame of two years and invest the net proceeds therein, subject to the approval of the shareholders. If approvals don't come, the proceeds are returned to the investors.

Why are SPACs not introduced in India yet?

Given the ample liquidity in the markets across the globe with interest rates being low and amid the frenzy of public offerings amid the pandemic, many companies executed their plans to go public following the SPAC route in the last 1-2 years in the foreign markets.

However, we have just seen the topic being raised in India and not the actual funds via SPAC, WHY? The current regulatory framework of India doesn’t promote the listing of companies via blank-cheque companies because as per the Companies Act 2013, the registrar of companies is authorized to strike off the name of companies that do not commence operation within a year of incorporation and SPAC typically takes two years to identify a target and proceed further.

Further, it does not find acceptance with the market regulator Sebi and its Act. To become a listed entity, the Sebi Act requires a company to have net tangible assets of at least Rs three crore in the preceding three years, minimum average consolidated pre-tax operating profits of Rs 15 crore during any three of last five years, and net worth of at least Rs one crore in each of the last three years.

THE BIG QUESTION: Should SPACs be introduced in India?

After getting a positive acceptance in the foreign markets, SPAC have turned out to be an alternative for getting early-stage firms listed on the exchanges in a much lesser period and process than the traditional IPOs. The introduction of SPAC will however evolve the listing pattern in the country and also boost the capital markets in India if introduced considering the involvement and risk of retail investors and other factors, said experts.

“IMO, SPACs should get introduced in India as it takes lesser time compared to traditional IPO and the companies also get expertise from the sponsors. If introduced in India, it will boost the capital markets of India,” said an expert in conversation with BW Businessworld.

Recently in an industry event, Ajay Tyagi, Chairman, Sebi, said, "Sebi's Primary Market Advisory Committee is deliberating on whether a framework for SPACs should be introduced in India and if yes, given certain concerns being raised on such vehicles, with what safeguards."

With many new-age technology businesses springing up in India, the regulators should consider encouraging SPAC structures to attract high-quality foreign capital into India, said experts.

In a conversation with BW Businessworld, Vaibhav Agrawal, Chief Investment Officer, Teji Mandi (Subsidiary of Motilal Oswal), highlighted that acquisitions in SPACs are being conducted on predetermined prices and are less vulnerable to the volatility of public markets.

"In traditional IPO processes, companies’ securities are valued through market-based price discovery approaches, which can be affected by market conditions," said Agrawal.