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SPACs: The new buzzword in stock exchanges

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A special purpose acquisition company (SPAC) or ‘blank cheque’ company is essentially a shell company set up solely to acquire or merge with an unlisted company, which gives its investors exposure to emerging businesses. Mint explains why are they so popular.

A special purpose acquisition company (SPAC) or ‘blank cheque’ company is essentially a shell company set up solely to acquire or merge with an unlisted company, which gives its investors exposure to emerging businesses. Mint explains why are they so popular.

What’s a special purpose acquisition company?

SPAC is an entity set up with the aim of acquiring a firm in an emerging sector or industry. The SPAC which raises 80% of the money through an IPO does not have any source of revenue or operations when it is set up. The balance 20% money is invested in the SPAC by its management team or sponsors. The money it raises is put away in an escrow account which is used during the acquisition. If the acquisition has not taken place and the money is unutilized for two years of the IPO, it is returned to the investors and the SPAC is delisted. SPACs are generally constituted by financial institutions or PE funds.

How are they useful to investors?

SPACs are seen as a highly lucrative option as they have been giving an industry average return of approximately 20% to sponsors. Moreover, they are also viewed as a risk-free option by investors as the investment is kept in an escrow account where it earns an interest until the merger or acquisition process is over. Thus, it is like buying an SPAC share when it is trading at a discount. If the SPAC deal fails, the investor can redeem his share and obtain the trust value; and in case of success, the shares trade at a value higher than the trust value giving the benefit of a higher market price to the investor.

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Risk-free investment

How is India preparing to allow blank cheque deals?

Sebi has set up an expert committee to explore the viability of formulating rules and regulations for SPACs. It has asked the panel to submit a report on permitting SPACs along with checks and balances to lessen risks under the current law. Its implications on governmental revenue collections through capital gains tax are also being examined.

Are Indian companies new to SPACs?

There have been cases of Indian SPACs such as Trans-India Acquisition and Phoenix India Acquisition. In 2015, Silver Eagle Acquisition acquired a stake in Videocon d2h. In 2016, Yatra Online Inc. listed on Nasdaq by way of a reverse merger with Terrapin 3 Acquisition, a US-based SPAC. With emerging economies seen as favourable markets, SPACs are looking towards India for targets, with ReNew Power being the latest, and Flipkart, Swiggy, Zomato, Delhivery, Grofers etc expected to follow soon.

What are the rules for SPACs elsewhere?

Over the last 10 years, SPACS have gained traction in the US. The SEC regulates SPACs in the US. On being listed, an SPAC is required to file quarterly reports irrespective of whether the acquisition or merger has taken place or not. 85-90% of the IPO money is invested in government securities till the merger takes place. The balance 15-20% goes towards SPAC’s expenses and if the deal is not done within 24 months, sponsors lose this part of the money.

Jagadish Shettigar and Pooja Misra are faculty members at BIMTECH.

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