SPAC & EVs: What is SPAC and is it available in India?
A wave of anticipated blank-check mergers involving firms targeting the fast-rising market for electric vehicle charging is poised to boost the pace of acquisitions already underway in the industry; which is when SPAC comes into the picture.
What is a Special Purpose Acquisition Corporation (SPAC)?
1. SPACs (Special Purpose Acquisition Companies) are companies that provide blank checks to public investors (typically through a traditional IPO).
2. The proceeds from the initial public offering are deposited in an interest-bearing trust account.
3. The blank check company's objective is to acquire another firm within two years.
4. If this does not occur, the firm will close and investors will receive their money back.
SPAC is thriving
SPAC has existed for decades but has lately had a renaissance. As of Q3 2020, 108 SPACs have raised more than the US $40 billion through initial public offerings, more than the previous decade combined.
India in the race for the SPAC
While SPAC transactions in India are still in their infancy, the number of SPACE-related discussions in the Indian transaction arena is rapidly increasing. However, prior to establishing SPAC structures in India, key Indian tax and regulatory factors must be addressed and designed effectively.
Is an India-based SPAC structure subject to any Indian regulatory approvals?
According to the present Indian exchange control framework, regulatory permissions may be required at important junctures (during SPAC investment and de-SPACing), and these approvals would be based on the merits of each case and would be subjected to careful examination by regulators. Regulatory permissions, on the other hand, may not always be necessary, depending on the mode/amount of investment and the planned structures.
SPACs have a thing for Electric Vehicles
These SPACs have become the preferred method of a public offering for many of these electric car startups. Here are just a few that became public this year:
1. These EV startups seek to go public via the SPAC route for the following reasons: It's significantly faster. The window of opportunity to go public can close rapidly and the standard IPO process might take up to a year and a half. Meanwhile, due diligence on SPACs takes just 6–8 months.
2. It is less expensive. The cost of a SPAC merger is often less than the cost of a regular initial public offering, which normally costs roughly 7% of funds obtained.
3. These businesses are unlikely to be able to go public via the conventional approach.
Investors' concerns about SPACs
The structure of certain SPACs may result in unbalanced incentives between public investors and SPAC sponsors. Typically, the sponsors are permitted to acquire 20% of the SPAC's shares at a nominal value of US $25,000, motivating the management to seek a suitable merger partner, and if the merger is successful, the equity value can be significantly greater. However, this structure may tempt sponsors to choose famous firms without completing adequate due diligence in the belief that the combined merger stock will perform well.
