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Special Purpose Acquisition Companies

Context:

The government is reportedly considering a regulatory framework for special purpose acquisition companies (SPACs) to lay the ground for the possible listing of Indian companies through this route in the future.

  • According to reports, the Company Law Committee, which was set up in 2019 to make recommendations to boost ease of doing business in India, has made this suggestion in its report submitted to the government recently.

Relevance:

GS III- Indian Economy

Dimensions of the Article:

  1. About SPAC
  2. Where India stands?
  3. Risk factors around SPACs

About SPAC:

  • An SPAC, or a blank-cheque company, is an entity specifically set up with the objective of acquiring a firm in a particular sector.
  • An SPAC aims to raise money in an initial public offering (IPO) without any operations or revenues. The money that is raised from the public is kept in an escrow account, which can be accessed while making the acquisition.
  • If the acquisition is not made within two years of the IPO, the SPAC is delisted and the money is returned to the investors.
  • While SPACs are essentially shell companies, a key factor that makes them attractive to investors are the people who sponsor them.

Where India stands

  • Early last year, renewable energy producer ReNew Power announced an agreement to merge with RMG Acquisition Corp II, a blank-cheque company.
  • This became the first involving an Indian company during the latest boom in SPAC deals.
  • As things stand now, the Indian regulatory framework does not allow the creation of blank cheque companies.
  • The Companies Act, 2013 stipulates that the Registrar of Companies can strike off a company if it does not commence operations within a year of incorporation.

Risk factors around SPACs

  • The boom in investor firms going for SPACs and then looking for target companies have tilted the scales in favour of investee firms.
  • This has the potential, theoretically, to limit returns for retail investors post-merger.
  • Also, even as the SPACs are mandated to return money to their investors in the event no merger is made within two years, the fineprint of several SPAC prospectuses shows that certain clauses could potentially prevent investors from getting their monies back.
  • Historically, though, this has not happened yet.

-Source: Indian Express

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October 2022
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