All you need to know about SPACs
Can you think of a way of listing a private limited company as a public limited without going via the IPO route? Well, Wall Street has a solution if not Dalal Street yet.
Special Purpose Acquisition Company (SPAC) is a listed and yet a shell company with no business operations that aims to acquire a private company; thus, making it a public company. This may sound crazy at first glance but we will soon unfold more details about it. SPACs are generally formed by the investors or sponsors that bear expertise in a particular industry or sector and aim to acquire companies in that particular industry or sector.
An alternative solution
Traditionally, a private company has to go through the IPO to make it public and raise funds. However, the IPO process comes with certain disadvantages for the company. IPO is a time-consuming process. It demands significant costs in the process. It comes with lots of nitty-gritty and restrictions led down by SEBI that are strictly required to be followed. On the other hand, SPAC gets itself listed on the stock exchange and strictly raises funds through an IPO. With this fund, it aims to acquire a private company. Post-acquisition, the private company automatically becomes public.
How does it work?
SPAC’s IPO investors bear no idea whatsoever about the fund’s utilisation and that’s why they are referred to as ‘blank cheque companies’. The funds cannot be used for any other purpose but acquisition and that is why it is called a special purpose acquisition company. The funds are transferred to an ‘interest-bearing trust account’ until acquisition starts. Interest earned in the trust is used as working capital. If SPAC fails to acquire any company within two years, the money along with interest is returned to the investors.
Positives & negatives
To look at some positive points, SPACs are saviours for private companies as they are saved from the trouble of IPO. The sponsors of SPAC get easy access to capital since the IPO process for them is relatively simple. The common shareholders get to be retail investors as they might lose a chance in traditional IPO. They also have a redemption option if the SPAC fails to acquire. On the other side of the coin, critics claim SPACs to be vehicles for the rich and famous (sponsors) to achieve unfair gains as they buy 20 per cent shares of SPAC at a great discount while common shareholders buy it at par. Also, a report from Goldman Sachs shows how post-acquired companies have underperformed in S&P 500.
SPACs and India
Currently, in India, SPACs are not allowed to raise funds via IPO. However, SEBI is exploring the potential of SPACs along with the regulations and checks that are needed to assess the risks involved. It has formed a separate team under SEBI’s Primary Market Advisory Committee. It will have to form new regulations or make amendments to allow SPAC’s functioning. According to the Company’s Act 2013, a company is needed to commence operations within a year of incorporation. SPACs might not fit this criterion. Like this, there are other regulatory concerns, which would be studied by SEBI.
Well, it would be crucial to keep an eye on SPAC guidelines by SEBI and how they would affect the market. Along with this, wait for the time till we see some interesting action in the near future!