Will SPAC be the New Route Adopted by Companies to go Public?

SPAC is a faster and less cumbersome way of raising capital compared to an IPO.
Will SPAC be the New Route Adopted by Companies to go Public?

The frenzy among companies to go public in the last 12 months is making them look at alternate routes that are faster and more convenient. SPAC is one such option that is slowly gaining traction. 

In the recent past, Sumant Sinha’s ReNew Power, one of India’s leading renewable energy producers, merged with Nasdaq-listed RMG Acquisition Corp. II to become the first Indian company to raise more than $1 billion by combining with a U.S. special purpose acquisition company (SPAC). This has raised a lot of curiosity among Indian investors about SPAC and other Indian companies are trying to explore the same route.

SPAC is essentially a shell company or a blank-check company. They primarily focus on being listed on the stock exchange with the purpose of joining hands with a private operating company with the goal of raising capital. This amalgamation allows for the company to smoothly shift from private to public. These companies do not have a mission or vision or commercial activities. They hold cash and investment assets along with IPO contributions which are held in an escrow account. SPAC is a faster and less cumbersome way of raising capital compared to an IPO.

SPACs are a hot option nowadays for companies planning to go public quickly without the turbulence associated with a normal IPO and investors have the opportunity to participate in high-return investments with limited risk. Some naysayers criticize the SPAC option as a shortcut since it bypasses several regulatory needs. Several new startups have gone public on Wall Street using this route without recording any sales.

Some of the reasons why some private companies would prefer the SPAC route to go public are given below:-

Stability - There is no guarantee on how an IPO will perform and its price is a function of investor appetite, market sentiment, and business valuations. With a SPAC, the price uncertainty aspect is eliminated and an exact purchase price can be negotiated.

Speed - While an IPO can take years to go through, a SPAC merger can be completed in a matter of months. This time crashing makes it very attractive for companies planning to raise money quickly.

Strategic Partner - All SPACs do not choose to become a strategic partner to the company they take public but that is a route that tech companies are taking in the US. A strategic SPAC operates in the same way as a venture capitalist.

Startups in India are increasingly tempted to take the SPAC route to go public. The stringent policies laid down by SEBI for companies wishing to pursue the IPO route is leading them to explore alternate routes for raising capital via SPAC. The money raised via SPAC needs to be invested within two years of setting it up. Else the proceeds need to be refunded to the investors with interest. The shares of SPAC are traded on the stock exchange just like any other publicly traded share.

How Does SPAC Work in Global Markets?

SPAC shares are accounted for by the Securities and Exchange Commission when they are registered by the SPAC sponsors. The sponsors also host pre-IPO roadshows to interact and network with potential investors.

Once the SPAC finds a company worth acquiring, they go ahead with the acquisition. This acquisition is known as a De-SPAC transaction and makes the acquired company a subsidiary of SPAC which already has shares trading on the stock exchange.

Sponsors usually acquire preferred equity in SPACs as they get access to better deal terms compared to investors in an IPO. Generally, a sponsor holds around 20 percent post IPO holdings which are eventually converted into company stake. Sponsors prefer to target companies with huge growth potential.

The SPAC route is more efficient in terms of the time and cost involved in completing the process. The motivating force of SPACs drive promoters and other shareholders to leverage the value of a company on the stock market as it multiplies returns when they exit

Though SPAC appears to be an ideal alternative to IPos on a global scale, some flaws and drawbacks will have to be amended before they can be implemented in India on a wider scale.
●    Clearly defined disclosure, independence, and conflict of interest-based regulations for SPAC sponsors. 
●    Reliable and vetted investor personnel who execute pre-IPO operations, refine managerial decisions pertaining to financials and accounts of the company, aid in a more transparent disclosure regarding pivotal factors like revenue, stock-oriented compensation, growing concern, and merger accounting.
●    Educating investors and protecting them from risks associated with SPAC-based investments while ensuring due vigilance will help them make informed decisions.
●    Ethical regulators ensure that due diligence is done with regard to sensitive information or documents, clear disclosure, and risk assessment. A SPAC merger involves a higher level of risk due to factors like a conflict of interest and possible risks with potential estimated data.

How do SPACs Fit into the Indian Market Environment?

SPACs are at a developmental stage in India at the moment. Tax and regulatory practices need to be refined to ensure a stronger impact of SPACs on the Indian economy. Indian residents can currently invest in foreign SPACs up to a limit of $250,000 per year.

Currently, according to the Indian regulatory policies, some approvals are mandatory to establish a stable SPAC-based organization in India. These approvals are based on the merits of each case and careful supervision by the supervisory personnel. 

How Prepared is India’s Market Environment to Introduce SPACs?

India does not have a specific SPAC regime in place, which is a regulatory requirement for financial products and services. SPACs seem to be a promising alternative to IPOs but need to be developed further to keep investors or possible sponsors aware of the risks involved and make the evaluation process more transparent. The strong emergence of SPACs is contributing towards redefining capital markets. It is, however, absolutely pivotal to assess the risk and reward ratio before using a new investment path to raise capital. 
 

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