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Rise of SPAC: Transformation from Private to Public Trading Company

In the contemporary years, appreciable upsurge of Special Purpose Acquisition Company ("SPAC") have been witnessed amongst financial market, investment chain and investor community. The unique approach of SPAC leading to transformation of privately owned company into public trading company has dazzled the financial innovation resulting into attaining popularity around the globe. In India, SPAC is gradually making space for commencing the de-SPACing, which can be embarked through the recommendations pulledaout from Company Law Committee Report, 2022.

Unambiguously, SPAC is a non-operational business preserved for potential future use. It is a popular tool to raise funds for the sole intention of transformation of private company into listed public company. Several renowned companies, such as Virgin Galactic and DraftKings, have gone public through SPAC mergers. This trend has magnetized both retail and institutional investors seeking opportunities in the stock market. This article delves into the concept of SPAC along with its escalation in the current time.

Special Purpose Acquisition Company (SPAC)

The acronym SPAC deciphers to Special Purpose Acquisition Company, a kind of investment vehicle or Shell Company which lacks commercial operation. The sole objective behind the formation of such company is to raise capital intending to acquire or merge with an existing private company to undertake a business operation by a medium of offering an initial public offering (IPO).

Another name for SPAC is Blank Cheque Company which means that the investors contribute capital without any clue of what company will eventually be acquired.

To be simply understood, without identifying the acquisition target, SPAC offers to the public IPO or goes to public for the purpose of fundraising and listing, which later will be utilised to acquire the target company and proceed with the transformation of private company into public trading company.

Key Features of SPAC

There are certain primary facets of SPACs as follows:
  • SPAC is typically led by a management team and organizers which includes sponsors who are also investors and commercial operators with certain acquisition targets and the process of merger.

Trust Account:

  • The IPO generated funds are deposited into an interest-accruing trust accounts maintained independently from SPACs day-to-day operations. These funds are usually allocated for the acquisition of private company within the period of two years.

Limited Timeframe:

  • Usually limited timeframe of two years is fixed or allotted, to identify a target company and complete the merger or acquisition. Failure to attain the objective will result into returning the capital to investors and SPAC will ultimately be liquidated.

Redemption Rights:

  • Shareholders have the right to redeem their shares at the time of the merger, typically for the initial offering price, if they do not wish to proceed with the merger.

De-SPACing Process
De-SPACing is the process which permits and provides several steps for the transformation of private company into a public trading company by merging with SPAC. This is the phase in the process that takes place after the agreements have been executed and before the actual occurrence of the merger or acquisition of the SPAC with targeted company.

There are several steps involved in the abovementioned process as:
  • Target Identification: The very first step refers that the SPAC management team identifies a suitable target company for acquisition from various industries and different criteria depending on the evaluation based on expertise and potential.
  • Negotiation on Terms and Conditions: Once a target is identified, negotiations take place to agree on the terms of the merger and acquisition, including the purchase price, ownership structure, and other details and agreement is made.
  • Shareholder Approval: Approval of the majority shareholders (including public shareholders and institutional investors) of the SPAC is sought for the combination with the identified target. The dissenting shareholders on the de-SPAC transaction are given the option to redeem their shares.
  • PIPE Investment: PIPE refers to Private Investment in Public Equity investment. In order to hedge against the risks associated with SPAC shareholder redemptions, and to bolstering the capital and resources for the ongoing public company; most de-SPAC transactions are now accompanied by a PIPE transaction, which involves issuing shares of a public company in a private arrangement with some selected investor / group of investors.
  • Occurrence of Merger or Acquisition: On the receiving of shareholder approval, the combination is completed, and the private company becomes a publicly traded entity. The combined entity often takes on the name and stock ticker symbol of the private company, and the SPAC ceases to exist as a separate entity.

De-SPAC Listing

A de-SPAC listing signifies the conclusion of the de-SPACing process wherein a privately owned operating company transitions into a publicly traded entity. As the outcome, company gains the official stock exchange listing status and becomes subject to the regulatory and reporting requirements that comes with being a new public company.

The key features of a de-SPAC listing include:
  • Public Trading: The shares of the privately-held company have been introduced to a stock exchange, enabling the general public to trade in them.
  • Liquidity for Shareholders: Shareholders of the private company, as well as the original SPAC investors, can now sell their shares in the open market, providing liquidity for their investments.
  • Financial Reporting: The merged company is subject to regular financial reporting requirements, including quarterly and annual filings with the relevant securities regulators.

SPAC Regime in India

The Company Law Committee Report, 2022 for the first time recommended studying and recognizing the concept of SPAC under the Companies Act, 2013, fostering the integration of SPACs, initiated by Indian companies, into both domestic and international stock exchanges.

As of now, India does not have a specific or dedicated regulatory framework for SPACs. However, a regulatory authority known as the International Financial Services Centres Authority (IFSCA), responsible for overseeing and regulating financial products, services, and institutions within the Gujarat International Finance Tec-City (GIFT City), is moving forward to take steps to address this issue.

IFSCA has recently released a consultation paper, which is a document seeking input and feedback from various stakeholders, including the public and industry experts. In this consultation paper, IFSCA is exploring the possibility of creating a regulatory framework to enable the listing of SPACs in the GIFT City.

Recent SPAC Transaction

In August 2021, Renew Power, India's leading renewable energy firm, ventured onto NASDAQ through a SPAC listing, creating considerable interest among Indian investors. The listing was accomplished through a reverse triangular merger, and the process unfolded as follows:

Existing shareholders of Renew Power Private Limited (an Indian company) converted their equity holdings into shares of Renew Energy Global Limited ("Renew Global"), a holding company incorporated in England for the purpose of merging their businesses..

Subsequently, a wholly-owned subsidiary of Renew Global merged with RMG Acquisition Corporation II, a NASDAQ-listed SPAC.

Renew Global listing on NASDAQ under a new symbol-RNW.

Way Forward
In India, SEBI has instituted a committee of experts to evaluate the feasibility of introducing regulations for SPACs. The Ministry of Corporate Affairs also published the Company Law Committee Report in March 2022 and made certain recommendations which involve the formation of regulatory framework and allowing entrepreneurs to list SPAC incorporation in India on domestic and global exchanges. Exit options to be provided to all the dissenting shareholders.

IFSCA consulting paper is also one of the primary facet for the rise of SPAC in India. The Committee also opined that for a foreign listing of Indian incorporated SPACs to become a reality, the commencement of Section 23(3) and 23(4) of Companies Act, 2013 is a necessary pre-condition.

In today's era of finance, SPACs depicts an innovative approach to taking companies public and have been a groundbreaking. They offer an alternative to the traditional IPO process, providing businesses with a faster path to the stock market. In India, the concept of SPACs is gaining recognition and regulatory attention, with organizations like IFSCA and SEBI exploring the possibility of introducing regulations for SPACs.

The way forward involves further regulatory evolution and a sustaining environment for SPACs to thrive in the Indian market. However, it is a significant challenge to evaluate that it doesn't give rise to exploitation of retail investors in the market and hand in hand focus on non occurrence of fraud or misuse of public raised funds.

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