Context: 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.
Key Points

• 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.

About Special Purpose Acquisition Company (SPAC)

• It is a corporation formed for the sole purpose of raising investment capital through an Initial Public Offering (IPO).
• At the time of their IPOs, SPACs have no existing business operations or even stated targets for acquisition.
• Such a business structure allows investors to contribute money towards a fund, which is then used to acquire one or more unspecified businesses to be identified after the IPO.
• Therefore, this sort of shell firm structure is often called a “blank-check company” in popular media.
• Once the money is raised from the public, it 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.

Key Significance of the SPACs

• Cost Efficient: A company can go public within months if it merges or is acquired by a SPAC. SPACs particularly position investors as unique opportunities to niche Indian businesses that intend to get listed on foreign stock exchanges, without incurring the mammoth costs associated with the process.
• Minimize Risk and Assure Security: Listing through SPACs is considered remarkable since the entire process takes place pursuant to a definitive agreement, with minimum risk and assured certainty.
• Provide Safeguard to Dissenting Shareholders: It also safeguards the interests of the dissenting SPAC shareholders as those that vote against the proposed acquisition are allowed to exit by selling their shares to the SPAC promotors.
• Attractive to Investors: These are attractive to investors, despite them essentially being shell companies, as the blank-cheque companies are people sponsoring.
• Opportunity for Exposure to Countries and Consumer Bases: For certain businesses, SPACs also provide an opportunity for exposure to countries and consumer bases where demand for such niche products exist, consequently allowing such companies to attain higher valuation.

India's 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.