Special Purpose Acquisition Companies (SPAC)

Introduction:

SPAC (Special Purpose Acquisition Companies) is a company with no business, it is specially formed for acquisition of another company through IPO. SPAC (Special Purpose Acquisition Companies) are structured as trusts with face value of $ 10/- per share. Companies Act 2013 does not approve SPAC directly but SEBI has issued guidelines only for foreign companies. Means a Indian company can list on foreign Exchange boards through SPAC easily however its not available for listing on any Exchange of Bharat

Back Ground:

In IPO companies need to disclose all its financial, operations, process, compliance and many undertakings from the directors promoters. Public disclosure of their business,while in case of Special Purpose acquisition companies since there is no business at all so all this disclosure mechanism is not there in the process.

Also in the traditional IPO route once the IPO is public for subscribers, if there is any volatility in the market at that time due to some temporary reasons it leads to under subscription of the IPOs. Oil, Gas, Petroleum Space sectors are such sectors which can be affected due to some temporary reasons, in this situation IPOs can be undersubscribed.

When it comes to under subscription it is very hard for companies since the overall process of IPO is very hard. So SPAC is easier than an IPO.

How does a Special Purpose Acquisition Companies (SPAC) work:

IPO Process: A Special Purpose Acquisition Company (SPAC) issues a standard price of $10 per share.
Funds are first kept in a Trust account.
Acquisition/Merger: After rasing the fund, the Special Purpose Acquisition Companies (SPAC) has a time frame of 18-24 months for identifying and merge with the target company, resulting private company becoming public company
Shareholder Approval: Both the company which is getting merged and SPAC shareholders should arrange for shareholders meeting where merger is approved by majority shareholders with special majority

Advantages of Special Purpose Acquisition Companies (SPAC):

Lower Risk for Companies: as informed above IPO route is very tedious, supposed the company has done all formalities and at the end if there is under subscription then the whole process needs to be done again if the company wants to raise funds from the public.
SPAC Sponsors: Since a Special Purpose Acquisition Companies are formed by experienced person in the market who have themselves established as a credible person in this case the threat of under subscription is overruled

Eligibility for Special Purpose Acquisition Companies (SPAC):

Special Purpose Acquisition Company issuer shall be eligible to raise capital through initial public offer of specified securities on the recognised stock exchange(s), only if:

a) the target business combination has not been identified prior to the IPO; and

b) The Special Purpose Acquisition Companies (SPAC) has the provisions for redemption and liquidation in line with these Regulations.

A sponsor of the SPAC issuer shall have a good track record in SPAC transactions or business combinations or fund management or merchant banking activities, and the same shall be disclosed in the offer document.
For the purpose of these regulations, sponsor shall mean a person sponsoring the formation of the SPAC and shall include persons holding any specified securities of the SPAC prior to the !PO.

An issuer shall not be eligible to list securities under these regulations if the issuer or any of its sponsors is -

debarred from accessing the capital market; or
a wilful defaulter; or
a fugitive economic offender.

IPO Process for SPAC:

The provisions relating to appointment of lead manager, in-principle approval from recognised stock exchange(s) and filing of offer document provided for Initial Public Offers under Part A of Chapter III shall mutatis mutandis apply to initial public offer by a SPAC issuer.
International Financial Services Centres Authority (IFSCA) may consider the proposed listing of a Special Purpose Acquisition Companies (SPAC) issuer on a recognised stock exchange on a case-by-case basis.

Risks and Considerations

Conflicts of Interest: It may be possible that the group of persons backing the Special Purpose Acquisition Companies (SPAC) may have their personal interest, which may not be in favour of the public at large who wishes to invest in such SPAC.
Performance of SPACs: Till date the success rate is not the same for all Special Purpose Acquisition Companies (SPAC). Some has failed also, so its not sure that it will be setting as profitable business only
Market Situation: Since SPACs itself does not have their business. So it may be guided through the general trends of the market. And may be affected if there is temporary turmoil in security market

Regulatory and Legal Aspects

SEC Oversight: The U.S. The Securities and Exchange Commission (SEC) monitors SPACs activities.
Disclosure Requirements: SPACs have to comply with all disclosure requirements of where they are going to use the funds.
From the data sources SPACs gained popularity around FY 2020.

Special Purpose Acquisition Companies (SPAC) activity in Bharat:

In Bharat , the SPAC market is still emerging compared to the U.S., but there have been notable developments and interest in this space. Some companies goes public on US exchange through SPAc is listed below:

1. ReNew Power

SPAC Merger: ReNew Power, one of India’s largest renewable energy companies, went public in 2021 through a merger with RMG Acquisition Corporation II, a U.S.-based SPAC. resulted ReNew Power to list on the Nasdaq which was successful listing of any Indian Company through SPAC route

2. Videocon d2h

SPAC Merger: Videocon d2h, a Direct to Home (DTH) televison provider, merged with Silver Eagle Acquisition Corp., a U.S.-based SPAC, in 2015. After this merger videocon D2H listed on Nasdaq. After this merger it merged with Dish TV resulting in largest DTH provider in the country

3. Eros International

SPAC Merger: Eros International decides to merge with a SPAC, 3iQ Corp, to form ErosSTX Global Corporation in 2020. This merger enhanced the capabilities of both and which was a significant deal in the entertainment industry.

Key Differences in regular IPO and SPAC:

Aspect	Traditional IPO	Special Purpose Acquisition (SPAC)
Definition	A traditional IPO is when a company offers its shares to the public for the first time to raise capital.	A SPAC is a shell company formed to raise capital through an IPO with the sole purpose of acquiring or merging with an existing private company.
Process	The company going public must undergo a lengthy process, including financial disclosures, regulatory approvals, and roadshows.	The SPAC goes public first, raising funds without identifying a target. Once public, the SPAC has 18-24 months to find a target company to merge with.
Regulation	Regulated by SEBI	SPACs are not authorised yet. Currently, they are mostly considered for overseas listings.
Time Frame	Traditional IPOs take months, sometimes years	The SPAC itself can go public quickly. After that, it have 18-24 months for identify target and merge
Risk Exposure for Investors	Investors buy into a company with a known business, financial history, so less risk.	Investors are investing in a company where they are mostly not knowing the exact business, adding more risk.
Valuation Certainty	Valuation is set through a pricing process set by SEBI.	The valuation of the target company is typically pre-negotiated with the SPAC sponsors.
Investor Type	Attracts a wide range of institutional and retail investors, especially in Indian capital markets.	SPACs often attract institutional investors, hedge funds, and high-net-worth individuals. Retail investor participation increases after the merger.
Costs and Fees	High costs due to underwriting fees, compliance, and marketing (roadshows).	SPAC sponsors usually take a significant stake (promote) and might charge additional fees. This could reduce value for post-merger shareholders.
Control and Governance	IPO investors buy shares and gain control as shareholders, with existing management.	After the merger, the acquired company takes over the management.
Market Sentiment	Market sentiment at the time of the IPO plays a significant role in pricing and success.	SPACs can bypass short-term market volatility in pricing.
Transparency	High transparency as the company must disclose detailed financials, business models, risks, and projections before going public.	Lower initial transparency since SPACs do not have operations.
Examples in India	Zomato, Paytm, LIC, and many other companies have followed the traditional IPO route in India.	Indian companies like ReNew Power and Videocon d2h have used U.S.-based SPACs to go public on foreign exchanges, but SPACs are still rare in India.

TimeLine of Special Purpose Acquisition Companies (SPAC)

Here’s a timeline for a SPAC (Special Purpose Acquisition Company) to be listed and complete its business combination (merger or acquisition):

Formation of the SPAC

Time Frame: 1-3 months
Sponsors (founders) create the SPAC composed of experienced investors and industry professionals.
First they file necessary documents for the formation of company’s .
Prepare the S-1 registration statement for filing with the Securities and Exchange Commission (SEC) (in the U.S.) or the appropriate regulatory body if it’s an international listing (for Indian companies, this could involve international exchanges like Nasdaq or NYSE).

Initial Public Offering (IPO) of the SPAC

Time Frame: 1-3 months
After formation of the companies SPAC filed for an IPO at a standard price, often $10 per share.
Marketing includes a minimum as they have no operation and it is limited to institutional investors as the retail investor may not be interested due to the large risk involved in it.
SPAC is listed after successful completion of the IPO.
Funds raised from the IPO are held in a trust account, which can not be used until the target and merger is completed.

Target Search Period (De-SPAC Process)

Time Frame: 18-24 months
The SPAC management is given 18-24 months to find a suitable private company to which is to be acquired, period allotted for this is known as target search period.
After identifying the target company, detailed due diligence is conducted to assess financials and legal issues to fit in the process.
Negotiation: this process is basically pre-decided but it may vary due to some current changes, including the valuation of the target.
If a target company is not found within the timeline, the SPAC is dissolved and all funds returned to the investors.

Announcing the Business Combination

Time Frame:1-2 months after identifying the target
This is the most critical where investors can have ambiguity since the business combination is the combination which will make the resulting company a success of fail.
Once the combination is set merger agreement is prepared and filed with regulatory bodies for approval
In US companies need tofFile a Form S-4 or other relevant forms containing information about the merger, including the business of the target company, financial statements, and the terms of the transaction.

Shareholder Vote

Time Frame: 1-2 months after the announcement
SPAC shareholders and target companies must vote to approve the merger or acquisition.
If shareholders approve through special votes the deal will move forward, in case of denial SPAC continues to search for a new target (if time allows) or forced to return the capital to investors.
Investors also have the option to redeem their shares for a pro-rata share of the trust account if they do not find combination favourable for them.

Closing the Business Combination

Time Frame: 1-3 months after shareholder approval
Upon successfully completing financial and legal provisions , the private company becomes public.
The SPAC’s ticker symbol is changed as per the new combined company.
So formed new company starts trading with new ticker and symbol while SPAC ceases to exist.

Post-Merger Operations

Time Frame: Ongoing
The management team of the target company takes over operations former SPAC holders becomes shareholders and company operates normal as a public company for their day to day operations

Conclusion

Special Purpose Acquisition Companies (SPACs) are useful methods for raising funds when the promoters are decided about the targets. In this method it is the easiest way for a company to get public who have any threat that their IPO may be undersubscribed due to some local instances.

Today I was going through the news. Where I found that in today's situation where Russia and Ukraine are under conflict. Israel and the Middle East is under conflict so any company whose business is export related, Oil, Gas, and other petroleum products may get fear of under-subscription due to the current situation. But this SPAC route can be helpful for preventing any such loss. This whole system is beneficial for this type of organisation. Insurance companies whose work is to give insurance to marine companies can also be direct beneficiaries of such a system.

However this whole system needs to be made leak proof. There should not be any loophole which can be used for draining away the money of investors.

References:

Registration Process on National Innovation Foundation (NIF) Portal राष्ट्रीय नवाचार प्रतिष्ठान (NIF) पोर्टल पर विद्यालयों का पंजीकरण प्रक्रिया

February 05, 2025

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Abhinandan Sah