Special Purpose Acquisition Company (SPAC) Way Forward for India Inc

‘Globalization of the Indian Capital Market - SPAC would be a preferred structure for Fund Raising.’

 ‘The Indian capital markets have come a long way in the last few years. From foreign investors looking at investing in the Indian markets via the FPI route to Indian companies listing on overseas stock exchanges. SPAC route will be the preferred structure going forward for Indian companies looking at raising capital.’

 For any nation to transition from a developing to a developed nation, the first and most important development that needs to take place is the development of the capital markets. A strong and vibrant capital market will be the enabling force to raise capital, channelize investments and develop the overall economy. The primary market in India has been doing very well and billions of dollars have been raised in the last 18 months. The investment has been channelized mainly from the retail investors in India and Foreign Portfolio Investors.

 The Indian stock markets have had a dream run over the last 12 months with most stocks doubling in price terms. During this period large numbers of companies have tapped the primary markets and have raised money via the IPO market. Retail investors have done well in case allocation of shares has been got by them in the IPO share allocation depending upon the demand of shares. The key is the ability for companies to raise funds via the primary market thereby helping the overall financial ecosystem to grow and also help banks and NBFCs to leverage this growth by increasing the total credit off-take in the economy.

 However, for Indian companies to compete on a global scale large amount of capital needs to be raised at a very competitive pricing. In order to do so, innovative and competitive structures are required. SPAC is one such structure that has been extensively used overseas and by a few Indian companies to raise funds at a global level and at a competitive rate. To compete at a global scale, companies not only compete at a product and service level but most importantly at a capital and funding level. Adequate capital available at an appropriate time and at a competitive pricing is the key to making a world class company. For Indian unicorns to compete at a global level key is raising funds using innovative structures.

 SPACs are companies formed to raise capital in Initial Public Offering (IPO) with the purpose of using the funds to acquire one or more businesses identified after the IPO. Commonly referred to as ‘Blank Cheque Companies’, SPACs are formed with the sole purpose of acquiring another company and do not have any other commercial operations. Investors in SPACs can range from well-known private equity funds to the general public. SPACs have around two years to complete an acquisition or they must return their funds to investors. The money SPACs raise in an IPO is 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. The fair market value of the target company must be 80% or more of the SPAC’s trust assets. Once acquired, the founders will profit from their stake in the new company, usually 20% of the common stock, while the investors receive an equity interest according to their capital contribution. A company might choose to go public through a SPAC versus an IPO because the process can be accomplished more quickly, with fewer associated costs and extensive financial disclosure requirements than an outright IPO.

 The current regulatory framework of India is not supportive of the SPAC structure. As per Section 248 of the Companies Act 2013, the registrar can remove a company’s name from the register of companies if it has ‘failed to commence its business within one year of its incorporation’.

 SPACs typically take two years to identify a target and perform due-diligence. If SPACs are to be made functional in India, enabling provisions will have to be inserted in the Companies Act. In March 2018, a Parliamentary committee asked the Government to define the term ‘shell company’ in the Companies Act in order to ‘avoid legal ambiguity and pre-empt avoidable litigations’.

 SPACs also face an issue as far as SEBI regulations are concerned. Section 26 sets minimum eligibility conditions for a public offer. The eligibility criteria for public listing, requires a company to have net tangible assets of at least INR 3 crores in the preceding three years, minimum average consolidated pre-tax operating profits of INR 15 crores during any three of last five years and net worth of at least INR 1 crore in each of the last three years. The absence of operational profits, net tangible assets would prevent SPACs from making an IPO in India.

SPACs have emerged as a promising option to raise public funding from offshore markets. They are especially suited for start-ups, who find it difficult to raise money in India from Indian funds. With SPACs, the start-up gets listed through a reverse merger with a listed shell company.

 SPACs have been used by Indian companies in the past successfully are picking traction especially in the start-up space.

 ·      Yatra was acquired by Terrapin 3 Acquisition Corp (TRTL), a NASDAQ-listed SPAC. TRTL was listed on NASDAQ in 2014 and Deutsche Bank was their underwriter.

·      Videocon DTH was listed on the NASDAQ through a reverse merger with Silver Eagle Acquisition Corp, a SPAC. Silver Eagle was listed in 2014 and Deutsche Bank was their underwriter.

·      Constellation Alpha Capital Corp., a SPAC, was listed on the NASDAQ in 2017. It is focussed on acquiring a target in healthcare services and manufacturing industry in India. Cowen acted as the underwriter for the offering.

·      Trans-India Acquisition Corp’s acquisition of Solar Semiconductor in 2008; however, the position was liquidated in 2009. Trans-India was an AMEX-listed SPAC whose offering was underwritten by Joseph Gunner and Co.

 Billions of dollars have been raised using the SPAC route overseas over the years. Around 755 IPOs by blank-cheque companies since 2009, 248 happened in 2020 and 281 in 2021, so far. The gross proceeds raised by SPACs in 2020 amounted to over USD 83 billion, while for 2021 the number stands at USD 91.65 billion and growing. India’s capital market at approximately USD 140 billion. Deeper capital markets can help release USD 100 billion of fresh funding every year that would rapidly accelerate the industry growth. 

 In these turbulent times when the disconnect between the broad based economy and stock markets have been amplified and due to the low cost of capital and adequate liquidity that has been present in the global capital markets, companies are looking at raising capital from investors in India as well as overseas. The key is to attract adequate amount of capital at a large scale which will help Indian companies compete with companies overseas.

 Investors should look at the LRS (Liberalized Remittance Scheme) route to invest in the SPAC structure. Indian regulators are already working on making appropriate changes in the regulations so that SPACs can be listed on the Indian stock exchange and Indian investors can invest in these innovative structures to try and minimize the risk and get an appropriate return.

 _Farzan Ghadially.