Explained: What are SPACs for which a regulatory framework may be in the works

What is the News?

The Government of India is considering a regulatory framework for Special Purpose Acquisition Companies (SPACs) to lay the ground for the possible listing of Indian companies through this route in the future.

What are Special Purpose Acquisition Companies(SPACs)?

A SPAC or a Blank-Cheque Company is an entity specifically set up with the objective of acquiring a firm in a particular sector.

How do SPACs work?

A SPAC aims to raise money in an Initial Public Offering(IPO) without any operations or revenues. 

The money that is raised from the public is kept in an escrow account which can be accessed while making the acquisition.

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

Advantages of SPACs

Firstly, a company can go public through the SPAC route in a matter of months, while the conventional IPO process is an arduous process that can take anywhere from six months to more than a year.

Secondly, SPACs are essentially shell companies. But a key factor that makes them attractive to investors is the people who sponsor them. Globally, prominent names such as tennis star Serena Williams, Dell CEO have participated in SPACs.

Thirdly, the owners of the target company may be able to negotiate a premium price when selling to a SPAC because the latter has a limited time window for making a deal. 

The risk associated with SPACs

An investor in a SPAC IPO is making a leap of faith that its promoters will be successful in acquiring or merging with a suitable target company in the future. 

However, due to a reduced degree of oversight from regulators, coupled with a lack of disclosure from the typical SPAC will mean that retail investors run the risk of being saddled with an investment that could be massively overhyped or occasionally even fraudulent.

Source: This post is based on the article “Explained: What are SPACs for which a regulatory framework may be in the works” published in Indian Express on 21st April 2022.