What is a SPAC?

We have been hearing announcements of startups raising funds, newly minted Unicorns, startups filing for IPOs, startups listing on bourses via SPACs. While most are aware of the first three, one may wonder what listing via Special Purpose Acquisition Company (SPAC) means. SPACs have risen to prominence during the pandemic. A SPAC is a shell company formed to acquire a private company and take it public.

Let us understand the SPAC process with a story-

Imagine Anisha loves a company called ABC Private Limited. She wants to buy the Company and take it Public. She decides to take the SPAC route.

Step 1: She forms a Company called Anisha Corp and applies to get listed on a stock exchange. Regulations in most countries (except India) allow such listings with certain conditions.

Step 2: Anisha goes on a roadshow to promote her SPAC, Anisha Corp, to relevant investors. Investors convinced of the vision & plan of her SPAC invest in it.

Step 3: Anisha Corp gets listed on the bourses, with 20% shares held by Anisha (founder’s stake)and the remaining 80% by other Shareholders. After listing, SPACs generally have a two-year window to complete the purchase of the target Company. In short, Anisha Corp has two years to acquire ABC Private Limited.

Step 4: In a shareholder meeting, Anisha discusses the idea of acquiring ABC Pvt Ltd, its business, financials, operations, management. The shareholders agree with Anisha and vote to deploy the capital raised to purchase ABC Pvt Ltd and merge it with Anisha Corp.

Step 5: Anisha makes a purchase offer to the shareholders of ABC Pvt Ltd, which is accepted. With this purchase, ABC Pvt Ltd gets listed on the stock exchange with reduced compliance, and regulatory norms at a pre-fixed share price.

Step 6: Anisha Corp renames itself ABC Corp after which the SPAC process is complete.

Probable SPAC listings by Indian companies in the news:

ReNew Power, a leading renewable energy company, is expected to list on NASDAQ by merging RMG Acquisition Corp (Shell Company)

Flipkart is exploring going public in the U.S through the SPAC route

India has a very uncomfortable relationship with shell companies and current regulations do not allow for a SPAC listing in India (on both NSE and BSE).

The most important question I leave everyone with is- Should a retail investor invest in organisations listed on a stock exchange through a SPAC? More on this soon.

What is a Shell Company?

Shell Companies are companies without any product or service, formed for specific financial transactions (maneuvers) like acquiring other companies, operating as a holding company, etc.