SPAC: The New Buzzword Among the Indian Start-Ups
In India, a company is said to be (publicly) listed when its shares can be traded on the stock exchanges. This not only allows retail investors to own a piece of a company, but also provides the existing shareholders an opportunity to unlock the value of their holdings, in addition to the company being able to raise fresh capital from the retail and institutional investors in the public market.
The conventional way for a company to get listed is through an Initial Public Offering, or an IPO, and we have seen many of those over the past year. In 2020, we not only saw large offers like that of SBI Cards (a total offer of shares worth INR 10,355 crores), but also mega over-subscriptions — the ratio of the total demand of shares to the total number of shares on offer — like that of Mrs. Bectors Food Specialities (198.02x) and Burger King (156.65x).
In the near future, the IPOs of LIC and the National Stock Exchange are also expected, which would provide the government (shareholder of LIC) and also multiple private equity investors (shareholders in NSE) an opportunity to unlock the value they have created for the two companies over the past many years of their functioning.
However, recently, another method of entering the public market, especially among the start-ups in India, has started to gain attention and that is through a Special Purpose Acquisition Company (SPAC), also known as a blank cheque company.
A SPAC is set up solely for the purpose of acquiring stakes in other companies, and is then listed on the stock exchange. Post listing, the company merges with another company, making the merged entity a listed company and hence the existing shareholders get an opportunity to sell their holdings to the investors in the public market. The existing shareholders of SPACs are also able to generate returns on their investments in the company as, more often than not, the SPAC will acquire another company at a discount, and may lead to the value of the shares of the company moving up significantly post the merger. It allows companies to raise capital, even when market conditions, otherwise, could limit liquidity.
Another form of SPACs, in which the company is not set up to merge with another company looking at getting listed but to acquire minority and majority stakes in them are also known as private-equity funds for retail investors, as retail investors are generally unable to invest in private equity funds due to the high threshold in terms of the minimum investments these funds require.
ReNew Power, one of India’s largest solar and wind energy companies, announced in February this year that it will be getting listed on the Nasdaq, an American stock exchange, by merging itself with an SPAC — RMG Acquisition Corporation II. Other companies like Videcon D2H and Yatra have raised capital previously using this mechanism. Additionally, start-ups like Flipkart and Grofers are also looking at following this route to list themselves in the American stock exchanges.
The companies are primarily looking at following this route as the process of an IPO is expensive, and can take months, if not over a year, to get approval from the regulators. Additionally, this method gives them more certainty over the valuation they can get, as it comes down to the negotiations they hold with the SPAC. And especially for start-ups, many of which have not yet started to generate profits, the valuation may become a matter of concern.
From the surface the SPAC process is rather straightforward but the details of each SPAC differ according to size, implicit costs involved, etc., making each SPAC unique. However, as with every process there are risks involved.
Firstly, if a SPAC merges with a company, whose prospects do not seem lucrative to the shareholders (of the SPAC) then they can cashout their investment at the initial price offer, making the process of cashing out hassle free and mostly simplistic. But, with this ease comes the complexity of the opportunity cost, depending on the amount of time it took a SPAC to merge, the (shareholders) money could have been invested somewhere else yielding a higher return. Additionally, while most SPACs return the money in case of investors choosing to cash out, in certain scenrarios the process can be challenging, especially if the investment value is very high or if it appears that an investor is trying to block a potential/current merger of a SPAC, making it duly important to read the prospectus of each SPAC before entering the trade.
Secondly, market speculation sees the share prices of certain SPACs bid up (over the initial offer price) even before a deal has been made or announced. This scenario offers the downside of lost opportunity cost of investment made.
In India, we don’t have the concept of SPACs yet, and hence the Indian startups looking at following the route are looking at foreign listings, especially in the US. However we do have a similar model with listed companies like Max Financial Services and Bajaj Finserv not having any business of their own, but functioning primarily as the holding companies of their insurance businesses.
If we look at the US Markets, there is a surge in the supply or too much supply of SPACs, which could lead to the possibility of a loss in demand attractiveness. Further, investors will over time start to become more cautious with choosing to put money in carefully considered SPACs, much like what they have been doing with IPOs.
All in all, IPOs will continue to be the primary method of entering the public market for Indian companies, at least in the short and the medium term. However, innovative mechanisms like that of a SPAC may start to garner more momentum, especially as more startups look at entering the public market, and provide an exit to their private equity and venture capital investors.
Disclaimer: The views expressed in this article are personal, and are not to be associated with the organisations we are a part of.
