With a lot of buzz around various Indian Unicorns warming up to the fast-emerging SPAC route, which gained much favour in the eyes of many prominent names of the Wall Street last year, and with a very noteworthy performance by SPACs during the beginning of the year in US markets a lot of questions must be popping up in your head like what even is SPAC and why are they getting so popular?
So today, let’s try to answer these questions, shall we?
What exactly is a SPAC and how does it work?
A Special Purpose Acquisition Company or SPAC for short is a shell company created for the single purpose of merging with or acquiring an existing company. Nothing more than this one thing. Several investors (called sponsors in this scenario) come together to form a hollow entity with the single agenda of raising money from the public, in exchange for some part of ownership in the SPAC, to acquire or merge with an existing company.
The company so formed is listed in the market through the IPO process to allow the public to invest in it, in exchange for a share in ownership. The money raised from the public by the SPACs during the IPO is placed in a trust account. These funds cannot be utilized for any other purpose except completing an acquisition or to return the money to the investors in case the SPAC liquidates, whereas the interest earned on this amount may be used as working capital for the company. The work of the SPAC now is to look for an acquisition target, a company with a working business model and looking to raise money through the IPO process, and seal the deal to acquire it or merge with it. They usually have 2 years to complete this process or they risk liquidating at which point the sponsors lose their money and pay back the investor’s money with interest.
The sponsors sometimes have at least one acquisition target in their minds but do not identify them to avoid extensive disclosures during the IPO of the SPACs, which is why these companies are also called blank-cheque companies.
Once the SPAC has found a good target and announces a deal, the shareholders get an option to accept the deal and receive shares in the new entity or if they disagree with the deal, then redeem their shares in the SPAC and get their money back.
Benefits of SPAC
Selling to a SPAC or merging with it comes with its benefits, which are used by the SPAC to convince the acquisition target to seal the deal. Going through with such a deal provides the company to expedite its conversion from a private equity firm to a public equity firm, from almost 18 months in the best case to just 3 months. This conversion is sought by companies to raise capital as well as increase their valuations.
Other than saving time, going the SPAC route also saves the company the costs associated with the traditional IPO process, which are not cheap. It also protects the company from the uncertainty present with the IPO process with regards to market reaction and whether it will be able to raise the required funds successfully. Selling to a SPAC essentially offers the company a faster IPO process without having to worry about the swings in the broader market sentiments.
For the investors, the sponsor being a person with huge market know-how and experience acts as a huge confidence boost in the SPAC. This along with the fact that their money is placed in a trust usable only for the sole purpose of the company, which is to acquire, and the existence of an exit option for them, provides them with a sense of security for their capital, acting as another confidence booster.
SPAC and India
India, as you might know, has very stringent rules and regulations for a lot of the things in the financial markets, including shell companies. The existence of these rules means that no SPACs can be listed on Indian exchanges.
However Indian companies and even investors are beginning to get attracted to this new way to go public. The recent $8 billion deal between ReNew Power, an Indian company, and NASDAQ listed SPAC RMG Acquisition Corporation II, is one of the largest listings via this route in the US that involves an Indian company.
With various reports suggesting that SEBI has asked its Primary Market Advisory Committee (PMAC) to look into the viability of SPACs in India and the regulations required to successfully adopt them here, it looks like the SPACs just might be here to stay for the long run.
Informative 👍🏻
insightful ⭐️