Special purpose acquisition companies (SPACs) is a Wall Street jargon for traded companies that hold practically nothing but cash on their balance sheets. The mechanism is relatively new in the Indian corporate space. SPACs buy private companies by way of merger, acquisition or similar combinations, thereby taking the private company public. Market exuberance, combined with the arrival of seasoned sponsors and management teams, has shaped the modern-day SPAC revolution.
The mechanism is gaining momentum in the developed world, by the day. Even during the pandemic last year, the global SPAC IPO gained momentum and its proceeds crossed the USD 100-billion mark.
Investing in SPACs is same as investing in publicly traded companies. Any Indian shareholder acquiring shares under SPAC share-swap needs to be mindful about any round-tripping consequences if it entails fund-infusion into India through the SPAC structure.
The Indian regulatory framework objects to the creation of blank cheque companies. The Companies Act, 2013, instructs that the Registrar of Companies (RoC) can withdraw the licence of a company if it does not begin operations within a year of incorporation. Specific approvals are required if the Indian target company falls under the regulated sector.
Although SPAC may not have yet found a strong footing in India, the Securities and Exchange Board of India (Sebi) continues to proactively review this mechanism. It has appointed a committee to scrutinise the feasibility of bringing regulations for SPACs in the country. The committee has given its recommendations, which are currently being deliberated at a larger forum.
Big Rise in Global SPAC Listing
The year 2021 saw 613 SPAC listings, raising a total of USD 163 billion – an increase of 96 per cent from the amount raised in 2020. As of April 2022, there are 59 SPAC listings in 2022 which raised proceeds of USD 10.5 billion.
Though the IPO count for SPACs has increased substantially in 2021, the average IPO size has reduced. The IPO size in 2020 was USD 336 million, which dropped to USD 265 million in 2021 and further fell to USD 174 million in 2022 (partial year).
From a private company perspective, SPACs are attractive as the private company goes public without the risk of volatility in the public market faced during an IPOs. However, the above convenience offered to companies is starting to give jitters to the investor fraternity. Investors are getting skeptic. Companies are seen withdrawing from previously announced SPAC deals because of market volatility in technology stocks and the challenging market.
Low stock prices after the merger may mark acute threat to SPACs because this can trigger a negative spiral of investor protest and agitation.
How successful are SPAC investments?
From an Investor’s perspective, the jury is still out whether SPAC may be a preferred route for investing in start-ups/ emerging companies. According to a recent study between 2003 and 2013, 58 per cent of companies that merged with SPACs were unsuccessful (this is comparatively a higher percentage compared to traditional IPOs).
The success of any novel mechanism is gauged based on the mutual benefit it accrues to both companies and investors. It seems that SPAC may have some distance to travel to be able to earn its reputation among the investor fraternity.
The author is the managing director and head (transaction tax) at RBSA Advisors. The views expressed in this article are those of the author and do not represent the stand of this publication.
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