Special Purpose Acquisition Companies (SPACs)

Special Purpose Acquisition Companies (SPACs)

News: The government is reportedly considering a regulatory framework for special purpose acquisition companies (SPACs).
• The company law committee which was setup in 2019 to make recommendations to boost ease of doing business in India has suggested frameworks for SPAC’s to be setup.

About:
• An SPAC, or a blank-cheque company, is an entity specifically set up with the objective of acquiring a firm in a particular sector.
• An SPAC aims to raise money in an initial public offering (IPO) without any operations or revenues.
• The money that is raised from the public is kept in an escrow account, which can be accessed while making the acquisition.
• If the acquisition is not made within two years of the IPO, the SPAC is delisted and the money is returned to the investors.

Significance of SPACs:
•  Listing through SPACs is considered remarkable since the entire process takes place pursuant to a definitive agreement, with minimum risk and assured certainty.
•  SPACs provide unique opportunities to Indian businesses that intend to get listed on Foreign stock exchanges. For example, the recent listing of Renew Power Private Limited, an Indian renewable energy company, on NASDAQ through an internationally incorporated SPAC in August 2021. Therefore, it speaks the popularity of SPACs.
• These are attractive to investors, despite them essentially being shell companies, as the blank-cheque companies are people sponsoring.
• For certain businesses, SPACs also provide an opportunity for exposure to countries and consumer bases where demand for such niche products exist, consequently allowing such companies to attain higher valuation.

Challenges:
• There are chances of lesser returns for retail investors post-merger.
• Not every SPAC are able to attract targets as the overall transactions is expected to be completed within strict timeline.
• As the process is time-bound, it may result in making hasty decisions which may prompt dissenting shareholders to exit and reduce overall gains for investors.
• In many cases, disappointing results have caused shareholders to commence class action suits and initiate investigations against SPAC sponsors in the US.

Way Forward:
• While recognising SPACs within the contours of the Companies Act is a welcome step, it may still require a more sophisticated analysis of SPAC-related issues based on prevailing market practices, in consultation with Securities and Exchange Board of India (SEBI).
•  It is necessary to tread SPACs with cautious optimism and greater regulatory oversight, given that instances of underwhelming performances by SPACs have slowly begun to surface.