Aditya Narwekar*
SPAC stands for Special Purpose Acquisition Company, also popularly known as ‘Blank cheque companies’. SPACs are corporations that are designed to take companies public without going through the traditional Initial Public Offering (IPO) process. They are usually new companies incorporated with the specific objective of merging with or acquiring an unlisted company within the set timeframe. Once a SPAC is incorporated, it raises capital through an IPO process and subsequently merges with or acquires an unlisted company, whereby such company becomes a listed company automatically instead of undertaking its own IPO process, which is a very cumbersome process.
Though SPACs have been around for decades, it has regained attention recently. SPACs raised a record amount of USD82bn in 2020, a period also referred to as the ‘blank cheque boom’.
A SPAC is generally formed by experienced fund-managers, private equity players or other executives, which is one of the main attractions for investors and public to invest in SPACs. As SPACs do not have any business or operating history, the credibility of the SPAC relies completely on the experienced management teams and the sponsors, who are the USPs for investing in SPACs.
A SPAC company gets listed on a stock exchange for fund raising through the IPO process and issues its units to the investors. Each unit usually comprises either a share or a warrant or fractions of the same to purchase shares at a later date. After the IPO, the units are separated into shares and warrants, which are then traded on the stock exchanges.
At the time of the IPO, SPACs have no existing business operations or even stated targets for acquisition. Thus, the prospectus of the SPAC mainly focuses on the repute and experience of the sponsors and the management. The money raised by SPACs in the IPO is kept in an interest-bearing trust account. These funds cannot be disbursed except for the purpose of acquisition or to return the money to the investors if the SPAC is liquidated. If the SPAC is unable to complete the specified acquisition within the set time frame, it shall dissolve and return the money to the investors.
After the fund raising is completed in the IPO process, a SPAC generally has 18 to 24 months to complete the target acquisition, generally known as de-SPACing. This acquisition is similar to a reverse merger. After the completion of the acquisition, SPACs usually retain the target company’s name and registers to trade under that name in the stock exchanges. The target of the acquisition must have a fair market value that is equal to at least 80% of the SPAC’s net assets at the time of acquisition. SPAC must make complete disclosure about the target, including audited financials, operating history and performance, complete terms of the proposed company acquisition etc.
The shareholders of the SPAC have voting rights to consent or dissent to the proposed target acquisition. The SPAC sponsors or the management team shall not receive any fees or remuneration from the company till the completion of the target acquisition. Thus, the SPAC sponsors typically receive about a 20% stake in the final merged company for a nominal consideration as compensation. This provides a huge upside, and hence, is lucrative for the founders of target companies that are usually start-ups looking for funding and expansion through an IPO route rather than debt funding. The investors receive equity interest according to their capital contribution. The public investors may either vote for or against the target acquisition and can redeem their shares in case they are not in favour of the acquisition. Typically, if 30% or more investors vote against the acquisition, the acquisition cannot go through.
If the SPAC requires additional funds to complete the acquisition, the SPAC arranges for private funding by way of debt or issuance of additional shares, such as a private investment in a public equity (PIPE) deal, who are generally the private financial institutional investors. The PIPE deal plays a significant role in preferring the SPAC route to a traditional IPO.
A typical IPO process requires a stated track record of operations, capital adequacy ratio, etc. and carries the risk of market volatility, unlike the SPAC route. Though the go-to-market process is quite similar, in a traditional IPO, the company raising funds approaches the market as a standalone. However, in the SPAC route, the company is taken to public along with the SPAC and PIPE investors. This enables better IPO marketing and is likely to reduce the public company readiness timeline, thereby accelerating the process. Additionally, the target company can negotiate its fixed valuation with the SPAC sponsors. Further, the investment of public investors has comparatively greater liquidity. In addition to the option of trading in the stock exchanges, the public investors can redeem the shares of the SPAC before de-SPAC while continuing to hold the warrants for exercise in future. The sponsors, on the other hand, holding the founder shares cannot redeem the shares till the completion of the target acquisition.
However, the investment by the SPAC investors is nothing less than a blind investment with no certainty about the target to be acquired. SPACs also carry the risk of the rejection of the acquisition of the target companies by the SPAC shareholders. The entire SPACing and de-SPACing process also involves considerable regulatory compliances and reporting requirements, including review under The Public Company Accounting Oversight Board standards.
With regard to the Indian business scenario, with the significant increase in the value and standard of operations of the Indian businesses and increasing globalisation rate, Indian businesses are desirous of accessing the overseas capital markets. Earlier, foreign capital could be raised only through the issue of American Depository Receipts and Global Depository Receipts, which are generally the less sought-out options. The Government of India, during 2020, introduced a policy for direct listing of shares of Indian companies in certain permissible foreign jurisdictions. With the growing popularity of the SPAC route, the International Financial Services Centres Authority, as on March 10, 2020 issued a consultation paper proposing to enact a unified regulatory framework (framework) for the issuance and listing of securities by Start-ups, Small and Medium Enterprises and SPAC. The framework recommends norms for capital raising and listing of SPACs on recognised stock exchanges in the GIFT city International Financial Services Centre in India, which is mostly similar to the current process in the US markets. SEBI has also initiated steps to provide the regulatory framework for SPACs in India.
Depending on the industry, shareholding pattern, etc, SPAC structures are evaluated in India. Some of the challenges with the current Indian tax and regulatory provisions are mandatory requirement to commence business operations within one year of incorporation, whereas SPAC takes 18-24 months for a business acquisition; difficulties to list non-operating companies from the SEBI listing perspective; tax implications on inbound or outbound mergers; round tripping structures; indirect transfer capital gains tax implications on share swap or transfer of shares; challenges for Indian promoters to hold the shares of a foreign entity from Foreign Exchange Management Act – Overseas Direct Investment and Liberalised Remittance Scheme perspective, etc. Therefore, it is not feasible to place a SPAC in India.
Yatra and Videocon DTH had undertaken the SPAC route in India previously. The recent SPAC deal of the India based ReNew Power has triggered the SPAC mania with a greater impact. Introduction of necessary amendments and lesser complex Indian tax and regulatory framework shall be a welcome step to boast the globalisation of Indian businesses.
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*Author: Aditya Narwekar – Partner, Deals, PwC India. The article includes inputs from Meghana Goud – Associate Director, Deals, PwC India and Priyanka Pathi – Associate, Deals, PwC India.
The views expressed in this article are personal.
