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A special purpose acquisition company or SPAC is an entity that is formed only to raise capital through an initial public offering (IPO).  SPACs are generally constituted by financial institutions or private equity (PE) funds.

SPACs are also known as ‘blank cheque’ companies as they don’t have any operations or revenues and are set up with an aim to give its investors an exposure to emerging businesses.

Even though SPACs are not new and have been in existence since a long time, such companies have recently become very popular in the US and there has been increasing demand now that SPACs should be allowed in India as well.

How does a SPAC work?

The purpose of SPAC is to bring a promising private company to the public investment market. A SPAC raises capital through an initial public offering (IPO) which is intended to be used to identify, target and acquire an existing, privately-held business.

Once the money is raised from the public, it is kept in an escrow account, which can be accessed while making the acquisition. Subsequently, an operating company can merge with (or be acquired by) the publicly traded SPAC and become a listed company in lieu of executing its own IPO.

If the acquisition is not made within two years of the IPO, the SPAC is delisted and the money is returned to the investors.

How do SPACs  differ from traditional IPOs ?

Taking the SPAC route can offer the owners of the target acquisition company a faster path to being listed on a public exchange, compared to the traditional IPO route.

IPO price depends on market conditions at the time of listing, whereas you negotiate the pricing with the SPAC before the transaction closes—which is much more advantageous in a volatile market.

For public shareholders, SPACs give the advantage of investing along with the sponsors in private equity type transactions.

For investors it is considered a lucrative option as it is seen as a risk free investment where you earn interest till the merger happens. If the SPAC deal fails, investors can redeem the shares.

Are Indian companies new to SPAC?

In 2016, Indian company Yatra Online merged with a US based SPAC and got listed on Nasdaq.

More recently, renewable energy producer ReNew Power last month announced an agreement to merge with RMG Acquisition Corp II, a blank-cheque company, in what became the first involving an Indian company during the latest boom in SPAC deals. The merger of ReNew Power with RMG Acquisition will result in the former’s listing on Nasdaq.

In addition to this, online grocery platform Grofers is also reportedly in advanced stages of exploring a SPAC deal. Walmart owned Flipkart is also spoken of as thinking to list on US exchanges via the SPAC route.

Are SPACs allowed in India ?

While India has not taken an official regulatory stand on allowing the listing of SPACs here, the Security and Exchanges Board of India (SEBI) has reportedly formed a group of experts to study the feasibility of bringing SPACs under the regulatory ambit.

Capital market regulator SEBI is planning to come out with framework on special purpose acquisition companies (SPACs), which will enable listing of startups on domestic stock exchanges.