Special Purpose Acquisition Companies are a huge success in the United States of America. Largely dubbed as an alternative to the age-old IPOs, SPAC is considered as a much viable options for the companies to raise funds.
Recently, Grofers and ReNew Power Pvt Ltd, the two new companies stated that they are considering raising funds via SPAC. Let us understand what is SPAC and why the companies and why should India open its door to the concept.
What is SPAC
Also known as Blank Check Companies, SPAC is a solely formed for raising capital through an IPO subjected thereafter to the acquisition of another company. These companies are strictly formed and raise money through IPO for acquiring another company in the future.
In case, it fails to acquire a company within the two years of its formation, they liquidate and return the funds raised. Unlike IPOs, the name of the acquiring target is not known to the investors. SPACS are also known as blank check companies.
How Does SPAC work?
Now, we already discussed these companies may or may not have a target initially, but they are thematic in nature. Usually, a SPAC before raising money from the investors will disclose their interest in the sector they are targeting. After raising the funds from the public through IPO it is stashed away in the Escrow account.
Once the target is identified, they acquire the company therefore resulting in a direct listing of the smaller company. The renowned founders, advisors and management team is what makes SPAC IPO worth investing in.
Benefits of SPAC
- Smaller companies that have a scalable and sustainable business model can get automatically listed on International exchanges through SPAC
- Investors can get the exposure in some good quality projects in other Geographies
- Investors get their money back (minus any expenses, taxes etc) if the company fails to find a target. This ensures that the funds of the investors go in the best growth companies only.
- Renowned management team ensures that the money flows only in the best companies, a huge benefit for the investors.
Downside of SPAC
The model brings a lot on the table for the new and unlisted companies as well as the investors. However, there are a few downsides also of this structure. For instance, the acquisition target should be found soon enough to ensure liquidation does not happen. In case of liquidation, the investors get the proceeds but after tax and expenses deducted leaving them with lesser amount.
When SPAC is formed the investors are putting their funds on the Sponsors rather the company. However, the promise of success cannot be guaranteed even if a SPAC has the best names on board. In that case, the investors could get exposure to a less desirable company or funds can get liquidated.
Conclusion
Nevertheless, India sure can tap the potential of SPACs, given proper information is given to the retails investors beforehand about the risks and rewards. In the COVID aftermath, the smaller companies could find it difficult to raise money through IPO and therefore looking for an alternative.
