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FINTUITIVE

A weekly blog where Facts and Intuition merge.

Special Purpose Acquisition Company: Rise & Future in India

1/7/2021

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A Special Purpose Acquisition Company or SPAC is a company solely formed with the goal of raising capital through an Initial Public Offering (IPO) and later use the capital raised to acquire and merge with an existing private company. These type of companies do not have any commercial operations of their own and are also known as “blank check companies”.  
The founders of a SPAC company are generally experts in some or other industry and have a deep understanding of business. As these are a type of Shell Company the management is the key selling point for raising capital for these companies. SPAC may contact an investment bank to handle the IPO where the valuation focuses on the management’s history since there is no performance history of the company. The capital structure may include retail investors, institutional investors as well as founders share. Once the money is raised all the fund proceeds are held in an interest bearing trust account until the company identifies an acquisition target. There are two possibilities from here – first being that the management team finds and completes the acquisition within a specified time period (usually 18 to 24 months) or if no acquisition is made before the predetermined date, the SPAC is dissolved and the proceeds from the IPO are returned to the respective investors. In case the management needs additional funds for acquisition they may arrange for committed debt or equity financing, such as private investment in public equity. After this if the business combination is approved by the shareholders (not necessary) and the conditions specified in the acquisition agreement are satisfied, the SPAC and the target business will combine into a publically traded operating company. Here the ticker of the SPAC is changed on the exchange after the merger.

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SPAC Working Process
Comparison with the traditional IPO process
Technically the only business of a SPAC company is to acquire a private company and help them to go public. So the question raises that why would companies go via this path when they can opt for going through an IPO process themselves. Well there are various reasons why companies may opt for this process. Traditional IPO is a very extensive process which involves a lot of back and forth between the legal authorities, regulators and public authorities. This takes time and may hamper the firm’s objective of raising capital smoothly and efficiently. Private companies also go through a lot of public scrutiny while going through the IPO process and involves a lot of roadshows trying to get the investors interested in the company. Thus need to generate demand for the shares of the company for a successful IPO. This all involves a lot of uncertainty and companies like WeWork and Uber found this the hard way. Comparing this to SPAC, the IPO is already been done and it removes the financial uncertainties of IPO failures as well. Going through this process also reduces the time for the company to go public and reduces the public and regulators’ scrutiny. While it has benefits there are downsides to going public through SPAC as well. The investors who raised the capital may or may not be interested in the company after the acquisition and thus very difficult to get long term investors on-board. Secondly multiple sources have mentioned that SPAC is generally more expensive as compared to an IPO. The cost can go as high as three to four times you pay for an IPO and additional to this the founders might also get 20 percent of shares of the target company at a very cheap rate as compared to the price charged to the investors. Though with increased competition the underwriter fees has come down significantly in recent times. Further the amount of due diligence done on the target company is significantly less than what the Securities and Exchange Commission (in case of US) mandates for a regular IPO making investors wary about investing in such stocks.   
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Rise of SPAC
SPACs or similar entities have existed since decades now. In the 1990s these companies focused on technology and healthcare industry while it gained popularity in the oil and gas industry in the mid-2010s when the low commodity prices drove investors to management teams with experience on finding good mineral based companies. The number of SPAC IPOs and the capital raised via them has steadily increased since 2013 and 2020 has seen a sharp rise in SPAC IPOs. 

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The first eight months of 2020 itself has seen the highest number of SPAC IPOs (81) and the highest amount of capital raised at $33.1 Billion. The year also saw the biggest SPAC IPO ever held by Pershing Square Tontine Holdings led by Bill Ackman at $4 billion. Various factors have fuelled the recent increase in the SPAC IPOs in 2020. As of June 2020 the unspent committed capital or “dry powder” held by the private equity firms was estimated at about $1.45 trillion. The increase in uncertainty this year due to the COVID pandemic and US elections also led many companies to forgo the traditional IPO process and accelerated the growth of SPAC IPOs. Entry of well-known investors and hedge fund managers in the SPAC space has also led in improving the credibility of such a structure.
Future of SPAC in India and regulatory Issues
SPAC have emerged as a promising means to raise capital and can help in public funding in offshore markets as well. This might particularly suite the Indian start-ups where the retail investors still have shown a very conservative approach. These also do not depend primarily on the private investments which might decline or dry up in the future. Though this brings huge opportunity for new businesses, Indian laws also need to be able to facilitate overseas funding or through domestic SPAC IPOs.
Some of the Indian acquisitions by SPAC are –
  1. Yatra acquired by Terrapin 3 Acquisition Corp (TRTL), a NASDAQ listed SPAC. The underwriter for this acquisition was Deustche Bank.
  2. Videocon DTH was listed on NASDAQ through a reverse merger with Silver Eagle Acquisition Corp., a SPAC. The underwriter for this acquisition was Deustche Bank.
  3. Constellation Alpha Capital, a SPAC listed on NASDAQ in 2017 aims to target healthcare services and manufacturing companies of India for acquisition.
Despite this the laws and regulations in India are detrimental for the growth of SPACs in India. Some of the drawbacks are –
  1. As per the Section 248 under The Company’s Act 2013, a company can be de-registered if it does not start its operation within a year of its incorporation. SPACs usually take from 18 to 24 months to find and acquire with a target company and hence this law acts as a major hurdle in SPAC implementation in India.
  2. Section 26 under SEBI’s regulations lists down requirements for any company to go for public listing offer. Some of the requirements include – holding net tangible asset of INR 3 cr. in each of the preceding three years, minimum pre-tax operating profit of INR 15 cr. In any three of the last 5 years etc. SPAC by nature of their operation cannot satisfy any of the above conditions.
  3. To list a company on any of the prominent exchanges of India (NSE & BSE) the company must follow SEBI regulations. Additionally, NSE requires the company to have positive earnings before depreciation and tax. Thus making SPAC not eligible for listing.
Thus separate laws regarding SPAC formation and listing need to be established in India so that SPAC structure can be recognised in India as well. Some countries have established separate laws regarding listing of SPACs.

References:
  1. https://www.investopedia.com/terms/s/spac.asp#:~:text=A%20special%20purpose%20acquisition%20company%20(SPAC)%20is%20a%20company%20with,have%20been%20around%20for%20decades.
  2. https://corpgov.law.harvard.edu/2018/07/06/special-purpose-acquisition-companies-an-introduction/
  3. https://www.theverge.com/21502700/spac-explained-meaning-special-purpose-acquisition-company
  4. https://www2.deloitte.com/us/en/pages/audit/articles/spac-risks-trends.html
  5. https://mnacritique.mergersindia.com/regulatory-challenges-special-purpose-acquisition-company-india/
  6. https://www.financialexpress.com/opinion/creating-more-investment-spac-angel-funds-based-on-spac-structure-can-bring-liquidity-for-sme-platforms/2131478/
  7. https://corporate.cyrilamarchandblogs.com/2020/09/using-spac-vehicles-as-a-means-of-listing-outside-india/

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