Capital markets globally are embracing several new initiatives. So is the case in India. The recent announcements in the Union Budget regarding One Securities Markets Code, trading in gold and corporate bond markets are very progressive, creative and promising. In the same spirit, India could consider embracing an alternative methodology for initial public offers (IPOs), called Special Purpose Acquisition Company (SPAC).
IPOs are an age-old and well-established methodology for companies to get listed on the capital markets. The practice has evolved well both globally and in India. Our IPO market and processes are very well structured. In the last few years, some of the global markets have introduced SPAC as an alternative to IPO.
Over the last 10 years, SPAC has been gradually gaining traction in the US markets. It has indeed emerged a preferred option over the past three years. In 2020, SPAC was used as a listing option for every alternative transaction, i.e. 50 per cent of the transactions were done through SPACs. As much as $83 billion was raised through SPAC. Given the success of SPAC in the US markets, our regulators should examine whether there are merits for this approach to be introduced in India as well.
SPAC is formed as a blank cheque company by an experienced management team or a sponsor with nominal invested capital, resulting into approximately 20 per cent interest in SPAC. The remaining 80 per cent interest is held by public shareholders through units offered in an IPO of SPAC shares. Each unit consists of a share of the common stock and a fraction of a warrant for future fund raise. The SPAC IPO is based on an investment thesis focused either on a sector or a geography, which is executed from the IPO proceeds.
A group of people or a management team comes up with the idea in a particular sector and puts together a business plan. Sometimes they are backed by a group of investors. The team goes out with the idea to raise resources by way of public offering. The IPO money is kept in an escrow account with a trustee to be used later once the target is identified.
Once the target is identified, the SPAC merges the target with itself, and the money kept in the escrow is released. Depending on the target, sometimes more money is also raised. In this way, the private/unlisted target gets automatically listed. Of course, the disclosure of the target company as per the public disclosure requirement is made at that point.
The management of the SPAC usually gets 24 months to identify and complete a merger with a target as per the plans set out by it. If the SPAC is not able to find a target and complete the merger within that time frame, it initiates the process of liquidation and money kept with the trust escrow along with any interest on that minus some expenses like taxes etc. is immediately refunded to the investors.
A major benefit of this product is reduced timeframe for IPOs. Plus, it makes fund-raising more certain for the issuer. The involvement of professionals in identifying the target also makes the investment a well-thought-through and a well-governed process. Though this is a new product, it has picked up significant momentum with approximately 248 SPAC companies listed on the US exchanges in 2020 alone with an average fund-raise of $335 million. In 2009, there was only one SPAC with a fundraise of $36 million. Interestingly, the average initial money raised by a SPAC has also increased from $200 million in earlier years to $335 million. So far this year, around 100 SPACs have been set up with an average fundraise of $291 million. While earlier almost 20 per cent of SPACs had to be liquidated, now the success ratio to find a target and merge is almost 90 per cent. Another factor at play is that the SPAC has started attracting several senior professionals and managerial talent.
SPAC is gaining significant popularity as an alternative to IPOs in the US markets. Given India’s large and mature IPO market, our regulators should consider allowing SPAC listing in India – of course, with all required checks and balances. It is understandable that there may be some skepticism around the risks associated with a new product. However, even if we make the beginning in a restricted way, the framework would evolve over time. In the recent past, our markets and regulators have exhibited openness towards new ideas and products, and SPAC could well be the next new kid on the block.
