“The energy it took to exit a mother’s womb is the same force required to manifest a dream...a different kind of struggle.”
These words of blogger and writer TF Hodge is what came to mind while trying to understand this entire hullaballoo about SPACs.
Yes, SPAC is the new buzzword in the business world and like the term “PE fund” which happened many years ago, this vehicle too is about helping fulfill the dreams of some entrepreneurs. That’s the altruistic view. But on a pure pragmatic level, it is about helping people with already a lot of money, make more money.
Special Purpose Acquisition Companies or SPACs have been around in the USA for a couple of years now but it was only in 2020 that it boomed and now the wave of this boom has hit Indian shores too.
SPAC is basically a shell company, it has no business as such - the SPAC’s only assets are typically the money raised in its own IPO. A bunch of HNIs or investors or institutional investors get together and float this SPAC. Its purpose is to get listed and then acquire another company, using the money raised in the IPO, merge with that company and get that acquired/merged company listed.
Suppose A is an institution and it, as a sponsor, forms a SPAC, known as ‘B’. Then ‘B’ gets listed through an IPO – the reputation of ‘A’ helps get more investors on board and an IPO sails through. So ‘B’ gets listed and this company now starts hunting for an acquisition – a company with a promise but needs funds for the next growth leap.
Within 24 months of listing, ‘B’ needs to find a company to acquire. Till then, the 85-90% of the money raised in the IPO is parked into an interest-bearing Trust account and 15 to 10% is used for covering the costs of the IPO. If the deadline is missed, investors will get back the money in the Trust with interest.
And once ‘B’ acquires a company, say, ‘C’, the SPAC’s investors can either swap their shares for shares of the merged company or redeem their SPAC shares to get back their original investment, plus the interest accrued while that money was in trust. The SPAC sponsors typically get about a 20% stake in the final, merged company.
SPACs are known as ‘blank cheques’ as investors are signed on when they do not even know whether a company will be acquired and get listed.
Sounds good? But in India, SPACs, unless there is a regulatory change can never take off as, to begin with, the Registrar of Company can remove the name of the SPAC if it does not commence operations within a year of listing while SPACs typically take 18 to 24 months to acquire another company. Plus, as per SEBI’s provisions, unless a company has a track record of operational profits, net tangible assets, it cannot make an IPO. Thus if SPACs are to become a reality in India, changes in the regulatory frameworks and tinkering with the tax provisions is essential.
But for now, SPACs are being explored as a route to get listed on the US stock exchange. We saw one such deal happening – ReNew Power opted for this route to list itself on Nasdaq and it was acquired by the US-based SPAC, RMG Acquisition Corporation II.
There are others too exploring this option – online grocer, Grofers is also in talks with New York based SPAC for NASDAQ listing. Flipkart, which is a Walmart company now is also looking to get listed in the US through a SPAC. Videocon D2H and online travel agency Yatra are also said to have sealed SPAC deals worth millions of dollars.
Yet, one needs to tread carefully here - Institutional investors may be using SPACs as a substitute for low-yielding fixed income returns as they have the option to exit with some equity optionality before a deal is announced. Yes, starts-ups are our growth engines but can be powered by speculative forces alone – that’s the question we need to ask.
And yes, SPACs make listing very easy but that alone cannot be the reason. The regulators, who are said to be exploring this option need to ensure that SPACs do not become bubbles, where the sponsors run out of credible companies to target or get mired in lawsuits.
Blank cheques are good but what if they are duds to begin with?