Special Purpose Acquisition Company (SPAC) Explained: Examples and Risks

Special Purpose Acquisition Companies (SPACs) have emerged as an innovative financial instrument that allows companies to go public without undergoing the traditional Initial Public Offering (IPO) process. Although popularised in global markets, their presence and relevance in India have also begun to grow. Often referred to as “blank cheque companies”, SPACs raise money from investors to acquire or merge with a private company, thus taking it public. This article explains what SPACs are, how they work, their benefits, real-world examples, and the associated risks investors should be aware of.

A SPAC is a company formed specifically to raise capital through an IPO with the sole purpose of acquiring or merging with an existing private business. It has no commercial operations or assets at the time of its IPO. Instead, it holds the funds in a trust account until it finds a suitable acquisition target.

SPACs typically have a timeline—often 18 to 24 months—to complete a merger or acquisition. If they fail to do so within the timeframe, they are dissolved, and the funds are returned to investors.

Understanding the lifecycle of a SPAC helps clarify how they differ from traditional IPOs:

Formation and Fundraising

A group of sponsors (often experienced investors, private equity firms, or former executives) registers the SPAC and launches an IPO to raise money from the public. The funds raised are kept in an interest-bearing trust account.

Target Search

Once the capital is raised, the SPAC seeks to identify a private company to acquire or merge with. This process must be completed within the predetermined timeline.

Business Combination or De-SPAC Transaction

Once the target is found, shareholders of the SPAC vote on whether to approve the merger. If approved, the private company merges into the SPAC, effectively becoming a publicly listed entity.

Post-Merger Operations

After the merger, the target company operates as a public company, and its shares trade on the stock exchange. The SPAC is dissolved in this process.

Globally, SPACs have been used to take several prominent companies public. In the Indian context, regulatory bodies have shown interest in introducing SPAC frameworks within the GIFT City financial hub.

Though Indian stock exchanges do not yet formally list SPACs under current laws, several Indian-origin companies have opted for SPAC mergers abroad. As regulations evolve, India may see more SPAC activity in the future.

Note: The securities quoted are for illustration only and are not recommendatory.

SPACs offer a unique route to public listing, often chosen for speed, flexibility, and reduced market volatility.

Faster Time to Market

Traditional IPOs involve a lengthy preparation and regulatory review period. SPACs offer an expedited timeline, which is ideal for companies seeking quick access to capital markets.

Certainty of Valuation

In a SPAC transaction, the valuation of the company is negotiated directly with the sponsors, allowing for better control over pricing.

Sponsor Expertise

SPAC sponsors often bring strategic value, experience, and industry connections that can help the acquired company grow post-listing.

While SPACs offer benefits, they are not without risk. Investors must understand these before committing capital.

Misaligned Interests

SPAC sponsors typically get a sizeable stake (often 20%) in the form of founder shares at nominal cost. This can lead to situations where sponsors push through a subpar deal to avoid liquidation.

Limited Disclosures

Initial filings for SPACs often contain minimal information since they have no business operations. This makes due diligence difficult for early investors.

Post-Merger Performance

Studies show that many SPAC-acquired companies underperform post-merger. The excitement of going public can be short-lived if fundamentals aren’t strong.

Regulatory Challenges

Regulators are increasingly scrutinising SPAC structures and disclosures. Future tightening of rules could affect their appeal.

As of now, Indian regulations do not permit SPAC listings on domestic exchanges. However, the International Financial Services Centres Authority (IFSCA) has made strides toward enabling SPAC listings within GIFT City. This could open a new channel for Indian companies looking to raise capital internationally.

SEBI has also indicated the need to study global SPAC trends and examine the feasibility of introducing them in Indian markets while ensuring investor protection.

Investors looking to participate in SPAC IPOs or post-merger entities should consider:

• The track record and experience of the SPAC sponsors
  

• Target sector and market trends
  

• Disclosure of use of proceeds
  

• Governance mechanisms and shareholder rights
  

• Redemption rights if they choose not to participate in the merger
  

Long-term success often depends on the quality of the target company rather than the SPAC itself.

SPACs present an alternative method of going public, offering speed and simplicity compared to traditional IPOs. However, they come with unique risks and regulatory uncertainties, especially in developing markets like India. As investors and regulators grow more familiar with this structure, SPACs may become a viable addition to the Indian financial ecosystem. Caution and due diligence remain key when evaluating such investment opportunities.

This content is for informational purposes only and the same should not be construed as investment advice. Bajaj Finserv Direct Limited shall not be liable or responsible for any investment decision that you may take based on this content.