No space for SPACs

Sebi needs to ease listing requirements

The Securities and Exchange Board of India (Sebi) and the International Financial Services Centres Authority are reportedly contemplating paving the way for special purpose acquisition companies (SPACs) in India. This is a risky proposition and will increase complications in financial markets. SPACs are essentially shell companies floated to acquire other firms and do not have any operations. They are created for raising capital through an initial public offering (IPO), which is used to acquire private unlisted firms. SPACs are also called blank-cheque companies because investors are not aware of the acquisition targets. Once the acquisition is complete, the SPAC reflects the identity of the acquired company. This is seen as a quicker way for privately held companies to get listed. It also helps them bypass the listing process, which not only takes time but is also somewhat expensive.

SPACs are normally floated by famous investors and bankers who claim to know better. But if they are not able to make acquisitions, SPACs are liquidated and the capital is returned to the investors. SPACs have gained significant traction in recent years on Wall Street. Higher levels and valuations in the stock market generally tend to increase activity in the primary market. Global markets have seen a record fundraising so far in the current year and about half of it has been done by SPACs. One of the reasons for allowing a SPAC-like structure in India could be to encourage start-ups to list on domestic stock exchanges. A number of start-ups are exploring listing opportunities, partly to give their private equity backers an exit route. ReNew Power recently announced a merger with a Nasdaq-listed SPAC.

However, allowing SPACs in India for this purpose would not be advisable because of a variety of reasons. For instance, this route is preferred by firms to sidestep regulatory scrutiny. Clearly, this will be in the best interests of neither the financial markets nor the investors. It is possible that such shell firms will be listed to acquire other companies at lofty valuations at the cost of ordinary shareholders. This could have a significant impact on the individual investors who are in any case ill-equipped to participate in a price discovery process. Besides, the recent data shows that companies acquired by SPACs have underperformed the broader markets in the US.

Further, it is worth recognising in this context that the capacity of the Indian securities market regulator is fairly limited compared to the Securities and Exchange Commission in the US. Differently put, India should not adopt something just because it is the “flavour of the day”. However, this is not to suggest that the Indian regulator should not encourage start-ups to list. In fact, there is a case for easing listing requirements. Sebi published a discussion paper recently for the Innovators Growth Platform with encouraging proposals. Some of the start-ups have gained significant size, though they are not yet making profits. Perhaps the regulator could consider allowing firms with assets or revenue above a threshold to list on the main exchanges with full disclosures. Investors would know the risks of investing in such companies. This will be a more transparent way of letting start-ups above a certain size to raise capital and allowing investors to participate in the new economy.