SPACs have emerged as one of the most popular routes used by companies to raise capital in 2020. Some say that 2020 is the year of the SPAC. The US market has seen $70bn in funds being raised by c.200 SPACs this year. For companies, SPACs seem to make sense as it gives them access to capital markets even when the backdrop is volatile. Will/Can Indian tech giants jump in
A recent article on Yahoo Finance quoted a Goldman Sachs equity strategist David Kostin saying that "this year will undoubtedly be known as the year of the SPAC". SPAC stands for Special Purpose Acquisition Company. As per the Securities and Exchange Commission (SEC is Capital Markets regulator for the United States), “A SPAC is a special purpose company that raises capital in an initial public offering (“IPO”) to enter into future undetermined business combinations through mergers, capital stock exchanges, assets acquisitions, stock purchases, reorganizations or similar business combinations with one or more operating businesses or assets.” The SPAC then “reverse-merges” with the target and usually assumes the name of the target company once the merger is complete. For those interested in digging deeper into the workings of a SPAC, the SEC document linked above gives a helpful technical overview.
SPACs have been around for a while. The last time they gained significant popularity was before the financial crisis of 2008. It is understood that SPACs usually mushroom when there is a lot of speculative or “risk-on” sentiment in the market. Historically, SPACs have had the reputation of being used by companies with questionable books. However, in 2020, SPACs have been one of the most popular sources for public equity fundraising for many high-growth companies with disruptive technologies.
Sectors range from Space Tourism, Electric Vehicles, 3-D printing, online gaming/gambling, among others. At the time of writing this article, press reports suggested that the US market has seen $70bn in funds being raised by c.200 SPACs this year.
A wide range of names like Bill Ackman (founder and CEO of Pershing Square Capital Management), Richard Branson (Founder, Virgin Group), Mark Cuban (Billionaire entrepreneur, investor, and TV personality from the show ′Shark Tank′) have also launched SPACs recently.
So why have SPACs been so popular this year One of the primary reasons is the market volatility in the ongoing economic crisis caused by the COVID-19 pandemic. Companies do not prefer going public via a direct listing in times of high market volatility. This is because, in highly volatile markets, the pricing of a deal can be erratic. Since SPACs are structured as negotiated deals (the target/operational company negotiates a set price with the SPAC management before agreeing to the reverse merger), it allows private companies to raise money with relatively more certainty.
However, this time, many analysts and market commentators are suggesting that the SPACmania is far from over and are not expecting this trend to fizzle out like in 2008.
There are many reasons for this. First, regulations for SPACs have improved over the years, at least in the US. E.g. In 2011, regulations around approving the final merger were streamlined. Also, in 2017, the NYSE eased its listing requirements for SPACs (i.e., brought the minimum requirement for 400 shareholders to 300, among other changes).
Second, 2020 has seen an exponential surge in demand from retail investors who are looking to disruptive companies that can potentially deliver exponential gains in the future. In the extended low-interest-rate environment, equities seem to be one of the very few financial assets that have a chance of delivering good returns.
For companies, SPACs seem to make sense as it gives them access to public capital in volatile markets. Also, the company can include financial projections (esp. if they are not profitable at the moment) with its investors. This is not possible in a direct listing. It is worth noting that while many of the companies going public via the SPAC route are from the US, it is certainly not limited there. The mature Indian start-up/tech ecosystem now has high profile tech companies (like Zomato, PhonePe etc.) which have expressed interest in accessing international public markets. Do SPACs offer a good route to market for them
As per an article by an India based law firm, Cyril Amarchand Mangaldas, India is not alien to SPACs as well. While the Company's Act and SEBI Regulations make it difficult to register a SPAC in India, US-based SPACs focused on India have included, Trans-India Acquisition, Phoenix India Acquisition, among others. E.g., in 2016, Yatra Online Inc. got listed on the NASDAQ via a US-based SPAC called Terrapin 3 Acquisition.
As expected, there are a few regulations and approvals a company must consider. The combination of the Indian company with the US-listed SPAC would need to be compliant “with the Foreign Exchange Management (Cross Border Merger) Regulations, 2018 (“Merger Regulations”), and Section 234 of the Companies Act, 2013, pursuant to an NCLT sanctioned scheme of merger” as per the law firm's article. In this case, the Indian office of the Indian entity becomes the branch office of the combined entity. Indian shareholders of the operating company receive shares in the combined entity.
This approval is given by the RBI and requires compliance with FEMA ODI regulations, Liberalised Remittance Scheme (LRS) and repayment of the guarantees of the Indian entity (under NCLT).
The article continues to say that most of these conditions can be satisfied, LRS limitations of $250,000 per financial years on shareholders who are individuals will be a hurdle. An alternative suggested is “a share swap between SPAC and the shareholders of the Indian target, such that the Indian target becomes a wholly-owned subsidiary of the SPAC and the Indian target shareholders hold majority units in the SPAC”.
While there are regulatory hurdles to cross, SPACs do seem to be an efficient solution to raise capital. For Indian companies, it offers a route where they do not have to go through lengthy roadshows, hiring banks/underwriters etc and can access international public markets via a negotiated deal. This is my view. How Indian start-ups see this opportunity in 2021, remains to be seen.