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SPACs, often called "blank-cheque companies", are shell corporations that raise capital via IPOs to acquire unlisted firms (target companies) and list them publicly. Once the acquisition is complete, the target company merges with the SPAC and becomes the surviving publicly-listed entity. SPACs are founded by seasoned investors/professionals
(sponsors) who have expertise in specific industries/sectors. IPO proceeds are placed in an escrow account till a target is identified within a fixed time frame which is typically 18-24 months. Failure to identify a target within the stipulated time results in liquidation of the SPAC and refund of money, along with interest, to investors.
Although deals involving SPACs have seen a spectacular rise globally, they are yet to gain popularity in
- Merger of
Videocon d2h withSilver Eagle Acquisition Corp (NASDAQ listing) [Completed in 2015]. In 2018,Videocon d2h voluntarily delisted from NASDAQ after finalizing an amalgamation with DISH TV -
Merger of Yatra India with Terrapin 3
Acquisition Corp (NASDAQ listing) [Completed in 2016] -
Merger of
ReNew Power withRMG Acquisition Corporation II ; to be listed on NASDAQ [Announced in 2021]
Besides the restrictions mentioned, issuers also need to fulfil inbound and outbound merger compliances and foreign exchange norms under the Foreign Exchange Management (Cross
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- Minimum offer size of
$50 million or any other amount as may be specified by the IFSCA from time to time - Sponsor shall hold at least 20 percent of the post issue, paid-up capital of the SPAC
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Minimum application size in a SPAC IPO shall be
$250,000 - Minimum subscription to be received will be at least 50 percent of the offer size
- Timeline for acquisition will be three years from the date of listing, extendable up to one year
While this is indeed a step forward, the proposal suffers from limitations. Currently,
All funding alternatives to IPOs have their share of pros and cons, and SPACs are no exception. Given that
Recent research published by Credit Suisse estimates that
There is no denying the fact that SPACs present certain downsides. A SPAC does not conduct any business operations but instead relies on the credibility of its sponsors; this amplifies the risk and uncertainty for investors. In the last few years, investors have lost money by placing bets on SPACs and target companies which were later found to be fraudulent. In order to meet the stipulated timeline, SPACs may end up shortlisting an undeserving target or overpaying for a target. Some also argue that compared to IPOs, the due diligence process involving SPACs is less stringent, leaving room for loopholes and manipulation.
As is the case with many such transactions, retail investors bear the brunt. However, these and other downsides have led to course correction by taking measures such as bringing on board accomplished sponsors, eliminating the concept of founder stock, and reduction in underwriting costs. If the Indian government and market regulators decide to go down the SPAC route, they can adopt best practices from countries such as the
The uncertainties brought about by the coronavirus pandemic have seen companies struggling to raise capital via traditional IPOs. SPACs have emerged as preferred vehicles for companies looking to go public in an environment where getting access to more traditional forms of capital is proving difficult. Such a mechanism offers a compelling opportunity for Indian firms to make forays into global financial markets through overseas listings. Conversely, Indian SPACs can acquire targets with attractive valuations and strong business models. In either case, a supportive regulatory environment is necessary to give wings to the dreams of Indian companies, especially start-ups and those promoted by first-generation entrepreneurs.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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