SPACs: Flavour of the season or real opportunity for entrepreneurs to approach public markets?

Before a SPAC is fully functional, one would need to bear in mind aspects such as tax implications for shareholders as well as foreign exchange and other regulatory implications. Image: Reuters

• By Nitesh Mehta and Arjun Goradia

A phenomenon that has certainly picked up steam and broken all sorts of records in the last two years and more so in the last four months is Special Purpose Acquisition Companies (SPACs) – investment vehicles that can be used to approach public markets. Simply put, these vehicles raise capital, get listed and thereafter look to acquire an existing unlisted target company across sectors/geographies. By doing so, it helps unlock value for SPACs investors and the target companies also get to go public in a compressed timeframe.

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The US market has experienced a spike in SPAC activity. In 2020 the number of SPACs has been almost up to 5 times that of 2019 and in 2021 SPAC activity has already crossed the 2020 numbers within 4 months. There are currently more than 400 SPACs seeking acquisition and an estimate of USD 140 billion dry powder available.

The recent activities of SPAC listings in the US are also expected to quickly attract the Indian markets, which have interesting private companies that are ready to go public in terms of scale and size of the business.

The broad reason why several SPACs have been surging is mainly due to the ease of listing through a SPAC route as against listing through a traditional IPO route for factors such as:

• An IPO process generally is a rigorous process, entails extensive preparation (including roadshows for promotion), and typically takes 12-18 months for listing overseas whereas an overseas listing through the SPAC route can generally be consummated in 6-8 months.
• The regulations in India currently do not permit a direct overseas listing for Indian companies, whereas Indian Companies who are looking to go public can consider raising funds by way of the SPAC route.

The spike in the number of SPACs and colossal liquidity available to be deployed demonstrates that SPACs are here to stay, and the opportunity is for real. However, the success of SPACs would not only depend on the identification and acquisition of the right targets but also as to what extent the value appreciation on investment for SPAC investors takes place post-acquisition, especially considering that the shares prices of some of the SPACs that have gone public have hovered around their initial offering price post target acquisition. Accordingly, factors such as the credibility of the SPAC Founders and the choice of target for SPACs would be the key determinants of a promising future for SPACs.

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SPACs, from various countries across the world (especially the US), have been approaching various businesses in India especially those in the technology, healthcare, and entertainment spaces, with a bid to invest in them and unlock their value globally. However, founders also need to understand whether they are SPAC ready in terms of their current business planning, governance, legal processes, reporting requirements, and cost for compliances as post-acquisition by a SPAC the target company would be governed by US regulators.

Additionally, from an Indian perspective, before a SPAC is fully functional, one would also need to bear in mind aspects such as tax implications for shareholders as well as foreign exchange and other regulatory implications, especially for Indian founders and shareholders.

While the regulations to accommodate offshore SPAC transactions from an Indian perspective are still awaited, as an endeavour to attract global capital for boosting India’s economic growth and development and to replicate global innovative methods for raising capital such as SPACs, the Government of India through its regulatory authority IFSCA has also recently proposed a draft framework for listing of SPACs on the recognised stock exchanges in the IFSC, in India. Considering the measures taken by the Indian government for promoting businesses in India, the Indian markets are likely to see increased traction and could be the next bet for SPACs.

Nitesh Mehta is Partner and Arjun Goradia is Manager – M&A Tax and Regulatory Services at BDO India. Views expressed are the authors’ own.