🤔 India to Finally Accept SPACs?

What do Virgin Galactic, WeWork and ReNew Power have in common? They've all taken the SPAC way to IPOs. And now Indian startups may also have that option.

A new variety of companies called SPACs have become pretty popular in the past few years.

In 2021 alone, these companies raised over $100 billion.

But so far, these companies couldn't gain much traction in India.

However, a new proposal from the corporate affairs ministry may change this soon.

---

First things First, What Are SPACs? 🔎

SPAC isn't another GenZ slang that you hear these days. It stands for Special Purpose Acquisition Company.

And what is this "special purpose" they serve?

They make the otherwise long and compliance heavy IPO process much faster for companies. How?

Yes, an IPO process is required here too!

But, what these smart investors do is register these companies well in advance (a SPAC need not acquire any company for up to 2 years. Lots of time for the sharks to find their favourite meal).

Plus, they don’t need to declare the name of the company that they are going to acquire in the future. 

Basically, they're pooling in money so that SOMEONE can find SOMETHING to invest in? Yep. It’s that crazy!

Crazy, but fast. You see, a SPAC doesn’t really have any operations. So, the financial statements and the draft prospectus filed can be prepared super quickly and the due diligence process also doesn’t take long.

Let’s look at the numbers:

In 2020, 247 SPACs were created, with $80 billion invested; and just within the first quarter of 2021, 295 were created, with $96 billion invested. 

What’s more, in 2020, SPACs accounted for more than 50% of new publicly listed US companies.

---

Why Has This Not Taken Off in India? 👀

Well, Indian laws are much much stricter. 

In India, the Companies Act 2013 states that any company that doesn’t begin business operations a year after incorporation could be shut down.

Plus, the SEBI Act states that a company needs to have tangible assets of Rs. 3 crores three years before an IPO and a minimum average consolidated pre-tax operating profit of Rs. 15 crores in any three of the last five years of the company’s existence. This isn’t all, there are tons of other conditions that SEBI requires companies to meet.

Even after all this, if investors do dare to form a SPAC, they have to take permission from the National Law Company Tribunal which could take a lot of time.

Result? Several Indian startups like ReNew Power, Yatra and others have taken the help of SPACs to list on the US stock exchange.

But why is India so strict?

Because SPACs are eerily similar to shell companies which are just created to reduce tax liabilities or for illegal purposes like laundering money.

However, India has now realised that these SPACs are much more than that. 

So, the SEBI and the Ministry of Corporate Affairs are preparing draft regulations to better regulate this space.

But ironically, this turn of events comes just as the US is getting stricter with SPACs.

Wait, why?

Because of the inherent risk involved with such a venture.

You see, SPACs have a deadline to finish merging with a particular company or startup.

With this deadline looming, managers may not be able to make the most optimum decision or finish their due diligence and may merge with a company that is not so profitable.

Result?

Investors lose out on money.

And these investors aren’t just super-rich people with a lot of money to burn.

No, the super-rich dudes are usually the first ones to enter such a deal. But they also often exit first, putting the whole burden on retail investors who had made the mistake of entering this space.

This is why SPACs will now have to answer questions like who will profit from the IPO process and at what price. Investors can also sue SPACs over misleading projections.

Will this move reduce SPACs’ popularity?

---

In a line: India is taking a step towards accepting special purpose acquisition companies, just as the US is getting stricter with them.

Quick Question: Do you think India’s acceptance of SPACs is a good move? Or will it end up hurting retail investors?

---

Share this with your friends via WhatsApp or Twitter and help them declutter news from noise! See you tomorrow :)

You can also listen to our stories. Catch it on Spotify, Apple Podcast, Amazon Music, Google Podcasts, Gaana or Jio Saavn.

If you are coming here for the very first time: Don’t forget to join us on WhatsApp to get daily updates! 👇