SPACs were all the buzz. So, what are they, and what are the new developments on this front?
Last Thursday, sources told PTI that Sebi is looking to come out with a framework on SPACs, written by The Economic Times. Sources also said that the capital markets regulator is anticipated to put in place guidelines in this regard in the coming week. Under the framework, the regulator might put in place a separate set of regulations on SPAC, whereby detailed listing rules would be offered for such companies.
The regulations would also include a minimum threshold size for an IPO, sources added. Sebi is anticipated to provide qualifying criteria for sponsor to make sure only seasoned and sophisticated individuals are allowed as a sponsor for an IPO via a SPAC vehicle.
But What Is A SPAC?
Before we continue, let us tell you what an SPAC is. An SPAC or a blank-cheque company is an entity solely set up with the objective of acquiring a firm in a particular sector. The aim of this SPAC is to raise money in an IPO, and it does not have any operations or revenues. Once the money is raised from the public, it will be kept in an escrow account. However, the people who buy into the IPO do not know what the eventual acquisition target company will be. Then, the SPACs founders or management team find a private company looking to go public via an acquisition.
Once an acquisition is concluded, the SPAC’s investors can either swap their shares for shares of the merged company or redeem their SPAC shares to get back their original investment, plus the interest accrued while that money was in trust. Usually, the SPAC sponsors get around a 20% stake in the final merged company. But what if the founders of the SPAC can not find a company to acquire? SPAC sponsors typically have a deadline of about two years to find a suitable deal. If they can not find a suitable deal, then the SPAC is liquidated and investors get their money back with interest.
SPACs & India
In February, ReNew Power announced that it will be merging with RMG Acquisition Corp II, a blank-cheque company. This was a first such major deal by an Indian economy, and it listed on Nasdaq, garnering gross cash proceeds of around $1.2 billion. There have also been reports that Grofers is in advanced stages of exploring a SPAC deal. News reports have also mentioned that venture capital firms Elevation Capital and Think Investments are anticipated to launch a SPAC focused on Indian technology firms looking to list in the U.S.
SPACs have been the talk of the town for a while, and more companies are looking to go public via a SPAC. But it does come with some problems. Firstly, finding the right target is a big challenge and there is a risk of an acquisition/merger not happening at all. There may also be worries around valuations, given that SPACs generally look for a target company that has a valuation of around 3 times the amount of money raised via the SPAC IPO.
Global regulators are paying more attention to SPACs these days, and SEBI coming up with a framework proves that point. We believe that there should be detailed guidelines about setting up SPACs in India, so that investors are protected from any unexpected losses.
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