SPAC, the alternative to an IPO

• Follow

Indian primary markets are packed with action. The first two months of 2021 saw eight companies listing on Indian bourses compared to zero in 2020. Also, approximately 10-12 companies have queued for IPO in March and April.

That apart, every day we get notifications about fundraising done by Indian startups. According to HexGn, Indian startups are estimated to have received $10.14 billion in funding across more than 1,200 deals in 2020 despite the COVID crisis.

In 2021, startups are now looking at newer avenues of fundraising that offer lesser regulatory compliance and a larger pool of resources. Special Purpose Acquisition Company or SPAC listing, fits the bill here.

SPACs have raised more than $38 billion year to date, with an average of $296 million for 128 SPAC IPOs, according to SPACInsider. That is nearly half the money raised by SPACs in 2020. Last year, SPACs hauled in a record $83 billion with an average of nearly $335 million for 248 listings.

Even in India, the concept of SPAC listing is not new. Online travel agency Yatra.com and Videocon D2H have listed abroad through SPAC deals in 2016 and 2014, respectively.

What is SPAC?

SPAC listing is the most talked-about shortcut to the global listing. SPAC is also known as ‘Blank Check’ are shell corporations designed to take companies public without taking the IPO route.

SPAC is a reverse of a traditional IPO. A SPAC goes public first usually with a highly regarded executive team able to raise money from large institutional investors with the intent to acquire a private company to put in its shell within about 24 months.

Sounds complex? In simple words, an IPO is basically a company looking for money, while a SPAC is  money looking for a company.

How does SPAC work?

The process is no different from a traditional IPO. Institutional investors buy into the offering, along with a smaller percentage of retail investors. The funds are then placed in an interest-bearing trust account. These funds cannot be disbursed except to complete an acquisition or to return the money to investors if the SPAC is liquidated. A SPAC generally has two years to complete a deal or face liquidation.

Benefits of a SPAC

Selling to a SPAC can be an attractive option for the owners of a smaller company, which are often private equity funds. Being acquired by a SPAC can also offer business owners what is essentially a faster IPO process under the guidance of an experienced partner, with less worry about the swings in broader market sentiment.

SPAC listing and the Indian structure

Indian companies are gearing up through reverse merger or de-SPACing. For this, a company creates an offshore entity.

As per media reports, the biggest issue Indian companies are facing apart from regulatory concerns is the transfer of shares to the externalised entity which under Indian law is taxable.

Renewable energy producer ReNew Power last week announced an agreement to merge with RMG Acquisition Corp II, a blank-cheque company or a special purpose acquisition company (SPAC). The merger will result in the ReNew Power listing on Nasdaq and receive gross cash proceeds of around $1.2 billion.

Food tech firm Swiggy and online grocery shopping portal Grofers along with other top unicorns are eyeing listings in the US market via the SPAC route.