Monday, March 24, 2008

Special Purpose Acquisition Companies: On the Rise

Special Purpose Acquisition Companies (SPACs) that are also known as “blank check companies” are gradually acquiring prominence in the Indian markets. It is worth briefly examining these entities and their advantages as well as the risks surrounding them.

SPACs are essentially shell entities with no business operations, and which raise funds from the public through an initial public offering (IPO). These funds are raised on the basis that they will be utilised by the SPAC to acquire one or more companies in the future so as to provide returns to their shareholders. The details of the future acquisitions or even the identity of the target entities are not known at the time of the IPO. The investors in the IPO largely rely on the management skills and reputation of the founders of the SPAC while making investments. SPACs are usually committed to a time-frame within which they are required to make acquisitions. In case the committed time elapses without any acquisitions, the investments will have to be returned to the shareholders with certain carrying costs. A detailed explanation of SPACs and the offering process is available at

SPACs have acquired prominence internationally, especially in the US and in Europe. The New York Times’ Dealbook cites a Dealogic report which states that last year, there were 66 initial public offerings for SPACs, raising a total of $12 billion. Many of these SPACs have also successfully implemented acquisitions. What is important to note, however, SPACs are yet not traded on the main stock exchanges around the world. For example, neither the NYSE nor NASDAQ permits listing of SPACs, resulting in most of the existing US listings taking place on the American Stock Exchange (AMEX). It is only lately that both these exchanges are considering proposals for listing SPACs as reported by the Blog. Even on the London Stock Exchanges, SPACs are usually listed on its AIM segment. The cautious approach adopted by the more prominent exchanges is owed to the innate risks and uncertainties involved in listing entities that do not have existing businesses (or even fairly concrete business plans) at the time of their public offering of securities.

The SPAC phenomenon is catching on in India as well. It has been reported by VC Circle that several SPACs have been formed in order to pursue acquisitions of Indian companies. These SPACs have been listed on both the AMEX as well as the LSE AIM. The reverse trend is also assuming importance, whereby Indian companies are contemplating SPACs that would be used to aid their acquisition of foreign companies. This trend can be gathered from VC Circle's report about HCL’s plans to set up an SPAC for overseas acquisitions. HCL’s example is important on two counts. First, it indicates the utility of SPACs for Indian companies as a means of financing overseas acquisitions. Second, it indicates that SPACs are not confined to financial investors, and that it can be used by strategic investors as well for acquisitions. With more avenues being made available for SPAC listings (in case the current NYSE and NASDAQ proposals to allow SPAC listings take effect), it is likely that SPACs would become more prominent in acquisitions both by Indian companies and of Indian companies.

That leaves the crucial question of whether SPACs can be listed in India. It seems to me that the current disclosure requirements of SEBI as well as the listing requirements of the stock exchanges would not permit a company such as an SPAC to be listed on the Indian stock exchanges. This is because the SPAC has no business whatsoever or even a track record, but only certain broad business plans to acquire target companies that are yet to be identified. This creates uncertainties and risks to investors. Unless the existing regulations are amended to create a separate category of listings for SPACs, or unless specific waivers are granted from the applicability of the disclosure guidelines for IPOs to such companies, Indian listings would be unlikely. At the same time, it would be prudent for the regulatory authority (being SEBI) and the Indian stock exchanges to tread cautiously on this front, and to permit such listings only after assessing the experience (and success) of SPACs world-over and those specifically involving Indian promoters or Indian target companies. SPAC investors need proper protection as they are signing “blank checks” after all.

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