SPAC structures have raised more than $80 billion in 2021 in the US markets. What are these SPACs and what does it mean for Indian stock markets?
What exactly is a SPAC?
Special Purpose Acquisition Companies or SPACs are essentially shell companies that are floated and come out with an IPO with the sole purpose of raising funds to acquire or merge with a target company. The SPAC does not have any other business other than buying out the target company and for that special consent is obtained from the holders of the SPAC. For the target company, this becomes a hassle-free route to get listed in markets like the US where the listing norms are very stringent and compliance is a challenge. SPAC permits the listing of an entity without the listing formalities entailed in a normal IPO.
Is Flipkart taking SPAC route
While there is no confirmation, it has been reported that Flipkart may look at the SPAC route to get itself listed in the US. A regular IPO in the US will take a long time for Flipkart. Instead, with the backing of its majority shareholder, Wal-Mart, it can easily adopt the SPAC route to get itself listed. Apart from Flipkart, it is reported that ReNew Power as well as Grofers may also seriously look at the SPAC route to get their shares listed on the global stock exchanges. It could be an interesting area in the coming years.
How SPACs can be useful
SPACs are useful in a number of ways. For the investors, it provides an easy and profitable investment opportunity. As most SPACs are floated by persons with strong domain skills, the knowledge levels work in favour of the investors in the SPAC. The target company that is merging into the SPAC, also has a major advantage in that the listing process is a lot simpler compared to the traditional IPO process. Also, the listing compliance is much lower since the SPAC has gone through the IPO process. By merging with the SPAC, the target company gets a chance to get listed on a premier stock exchange in a shorter time span.
Concerns on SPAC model
One agenda item for SEBI on SPAC is to explore regulatory implications of the move. For example, Indian regulators are averse to the term, “Shell Company” and that could pose a problem. Also, the Companies Act calls for business to start within 1 year of incorporation and that would be a major roadblock for Indian SPAC structures as most SPACs have a time period of 2-3 years to finalize and acquire the target company. There is also a fear that this could lead to a major export of capital raising as more Indian companies may use the SPAC route to get listed in the US. SPAC is a great idea which caught on in the US. India must hitch on to it, but regulatory concerns must be addressed first.