HDFC head cautions against acquisition firms

HDFC Chairman Deepakh Parekh today cautioned investors against the increasing trend of setting up Special Purpose Acquisition Companies (SPACs) for raising funds on the AIM.

SPACs are essentially firms that raise money through public offerings with an objective to acquire small- and medium-sized firms focusing on a particular sector or country. The acquisitions are made within a specified timeframe or the funds are returned to the investors.

Parekh, also the chairman of the CII National Council for Infrastructure Development, was speaking at a seminar on 'London Listing - Special Emphasis on AIM'.

"Conventional investment wisdom or perhaps even a pea-sized brain would tell us that you do not hand over millions of dollars to a group of a publicly listed company that does nothing, has no firm business strategy and may never have any assets. Yet the impressive returns of 40 per cent is reason enough for investors to savour SPACs," he said.

He added that there were close to 10 India dedicated SPACs, that have raised funds ranging between $350 million to $500 million and were now on the prowl to acquire Indian companies. There was already an AIM-listed India dedicated SPAC, which recently made an acquisition for $110 million.

"Clearly, this is just the beginning of sophisticated investment vehicles, but investors must also realise that the India party with extraordinarily high returns cannot go on forever," he said.

"At the same time, we must caution against reaching a pump and dump kind of situation which can undo all the good investor sentiment that has so painstakingly been built up in India. Parekh also questioned the Securities and Exchanges Board of India's (Sebi) restrictive regulations.

"As the world markets are increasingly integrating, is the Sebi's insistence on a prior primary listing in India relevant ay longer? Is this regulation really protecting the domestic market? Perhaps not," Parekh said.

Speaking on the globalisation of Indian companies, Parekh said that there could be two ways to look at the fast catching trend of foreign companies domiciled elsewhere holding Indian assets getting listed on AIM, as only two Indian domiciled companies - Great Eastern Energy Corporation and Noida Toll Bridge - have listed on the AIM.

"Are our Indian companies using a loophole in the system, bypassing Indian guidelines of a prior listing by setting up subsidiaries abroad, raising money at the AIM and routing the money back to invest in India? Or on the flip side, good market dynamics state that companies should be allowed to raise funds without restrictions in the most efficient manner with the least cost."