SPACs, the Final Frontier

Context: Special Purpose Acquisition Companies (SPACs) will enhance India's risk appetite and innovation ecosystem.

Benefits of SPACs

• Provide a quicker Initial Public Offering (IPO) process: than a traditional IPO of an operating company. (Because a SPAC is a 'blank cheque company', without any historical financial results and assets to be disclosed and audited)
• Improve risk-sharing: SPAC founder-management team will be investing on behalf of its shareholders, which constitutes more diversified position for investors. Thus results in:
  • Enhanced risk appetite.
  • Moving up the innovation and intellectual property (IP) scale: As the financiers will fund riskier ventures due to risk-sharing with entrepreneurs.
• Benefits Investors:
  • Broaden investors' access to investment opportunities: As SPACs are liquid investment vehicle with an opportunity to invest small as well as large amounts as opposed to Private Equity (PE).
  • Investor protection features: E.g. funds raised are deposited in an interest-bearing trust account for up to two years.
• Expand access to capital: That will help to finance the growth of young, innovative enterprises
• Benefits Indian capital markets:  due to its competitive edge over other Asian markets.
• Improves corporate governance and the operating efficiency of businesses: By increasing India's Mergers and Acquisitions (M&A) activity.

Concerns related to SPACs

• They are risky, like any other IPO. 
• Promoters are in a disadvantaged position: compared to investors.
  • Access to interest-bearing trust account is limited: only for a target firm acquisition, and that too is subject to super-majority shareholder approval.
  • If SPAC fails to make an acquisition within two years, or if shareholders do not approve the investment proposal, the promoters are left empty-handed
• High issuance costs: affecting its performance, E.g. in the United States, the post-acquisition performance of SPAC was less stellar compared to post-listing performance.
• Bureaucracies' disinclination to embrace SPACs: due to fear of failures putting the blame on them.

Way Forward

• Institutions (SEBI, judiciary and enforcements) should be responsive to the needs of SPAC investors.
• Political enthusiasm is essential: to nudge the bureaucracy to accelerate SPACs introduction into India's capital markets.