There have been many companies that have gone public in 2022 following the pattern from 2021. These new companies have sought the help of the stock markets to raise capital and meet their various objectives of the IPO. Apart from IPO, there is another way of raising capital through the open market and that is SPAC. In recent years, this model has been gaining huge traction in the country. Given hereunder is the meaning of SPAC and various details of the same.
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What is the meaning of SPAC?
The term ‘SPAC’ is the abbreviation used for Special Purpose Acquisition Company. It is a type of shell company that is used to raise money through an Initial Public Offer (IPO). The purpose of such a shell company is to ultimately acquire or merge with an existing company and essentially take that company public. SPACs are also known as “blank check companies” in the market lingo as they typically don’t have a specific business plan or target company at the time of their IPO.
SEBI is also likely to allow the listing of SPAC in the Indian stock markets. In 2020, there have been approximately 250 SPACs mostly in the US. More recently there have been SPACs from Indian entities that have been listed on the US markets (ReNew Power’s merged with US-based firm RMG Acquisition Corporation II and then got listed on Nasdaq). The key feature of SPACS is that they have a few years to find a company that they want to take public. If they fail to find such a company, they must return the funds collected to the respective investors.
What are the steps in SPAC listing?
The framework for SPAC listing in India is still under review. However, the usual steps for SPAC listing in international markets are given below.
- Formation of the SPAC is the first step where a group of sponsors or investors come together to form a SPAC. It is done by incorporating a shell company with no commercial operations.
- The next step is to file the required documents for an IPO and meet all the necessary requirements.
- SPACs can also have warrants that are derivative securities. These securities give the holder the right to purchase shares of the SPAC at a fixed price. These securities may be listed for trading separately from the SPAC shares.
- The management team of the SPAC analyses critical data to identify a target company which will then be merged with or be acquired. This process will usually be completed within two years of the IPO.
- After identifying the target company, the SPAC’s shareholders vote to approve the merger or acquisition. Following this, the target company becomes a publicly traded company.
- The merged company’s shares are then traded under a new ticker symbol on the stock exchange. The SPAC on the other hand is delisted or renamed.
What are the benefits of SPAC?
The very purpose of creating a SPAC is to raise capital to acquire an existing company. The key benefits of SPAC are given below.
- Access to pre-IPO companies
SPACs are an excellent vehicle to invest or gain exposure to companies that are not yet publicly traded. This kind of investing is quite attractive for investors who prefer to be part of a company with a potential for significant growth right from its grassroots level.
- Potential for high returns
If the SPAC successfully acquires a company that experiences significant growth, the potential returns for investors can be quite high.
- Reduced risk
SPACs are not tied to a specific business model or industry and hence are usually considered less risky than traditional IPOs. Moreover, the funds held in the SPAC are held in trust until a merger or acquisition is completed. This protects the investors’ interest from the risk of the SPAC failing till they find a suitable target company.
SPACs deal with investor funds and hence, have to provide the necessary information to attract the necessary funds. This information includes the acquisition targets, plans for the acquired company, the risks involved in the process and with the target company, the necessary compliances, etc. This information can provide investors with better transparency than they might get from a traditional IPO.
Unlike private investments, shares in a SPAC can be traded on the public markets. This provides investors with liquidity that they might not have with private investment.
What are the risks of SPAC?
SPACs are relatively new in the Indian markets and lack proper regulations that are still in the development stage. However, some of the significant risks of investing in SPACs are given below.
- There is a lack of clarity on the potential targets of the SPACs till the completion of the merger with the target company. This creates ambiguity for investors which can deter them from investing in SPACs.
- There is no definite guarantee that the SPAC will be able to successfully acquire a company for merger or acquisition. SPAcs are bound to return the funds invested in it if they fail to find suitable targets for purchase within the given timeframe.
- Investors have no say or control in the process of selection of the target company or the merger process. This can further make the investment in SPACs less attractive.
- The final valuation of the target company can be a cause of concern for the investors which can further push them away from SPACs.
- The shares prices or SPACs are volatile during the merger process which can lead to significant losses for the investors.
SPACs are a good investment vehicle that can help investors park their money and wait for attractive investment options within the given timeframe. This can therefore be a useful instrument in targeting companies with good growth potential. However, there needs to be significant work on its regulations and its suitability in the Indian markets from SEBI, stock exchanges, and other relevant players
SPACs need to find potential targets for mergers or acquisitions within 2 years from the IPO.
The popular name for SPACs is ‘Blank Check Companies.
Till the completion of the merger or acquisition, the SPAC funds are kept in an escrow account and have to be refunded to the investors if they cannot find a suitable company for investment within 2 years.
The biggest risk of investing in SPACs is the risk of not finding suitable companies for investment within the given timeframe or the poor performance of the SPACs which has been the highlight in the recent past.