What are SPACs for which a regulatory framework may be in the works

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.

Background

• According to reports, the Company Law Committee was set up in 2019 to make recommendations to boost ease of doing business in India.
• This committee has made this suggestion regarding SPACs in its report submitted to the government recently.
• The concept of SPAC has existed for nearly a decade now, and several investors and company promoters have used this route to take their investments public.
• The vehicle gained momentum in 2020, which was a record year for SPAC deals; this record was broken in 2021.

What are SPACs?

• An SPAC, or a blank-cheque company, is an entity specifically set up with the objective of acquiring a firm in a particular sector.
• They aim 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.
• Globally, prominent celebrities have participated in SPACs.

Where does India stand?

• 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.
• SPACs are mandated to return money to their investors in the event no merger is made within two years.
• However 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.

Exam Track

Prelims Takeaway

• SPAC
• IPO
• Blank Cheque companies