Special Purpose Acquisition Companies (SPACs)

Special Purpose Acquisition Companies (SPACs)

Subject: Economy

Section: Monetary Policy

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.

Concept:

An SPAC, or a blank-cheque company, is an entity specifically set up with the objective of acquiring a firm in a particular sector.

An SPAC aims to raise money in an initial public offering (IPO) without any operations or revenues. The money that is raised from the public 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.

SPACs are mandated to return money to their investors in the event no merger is made within two years, 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.

SPACs are essentially shell companies, a key factor that makes them attractive to investors are the prominent people who sponsor them. Globally, prominent names such as former NBA star Shaquille O’Neal, tennis star Serena Williams, former TikTok CEO Kevin Mayer, Dell Technologies founder and CEO Michael Dell, billionaire and venture capitalist Vinod Khosla etc. have participated in SPACs. However, celebrity involvement in a SPAC does not mean that the investment in a particular SPAC or SPACs generally is appropriate for all investors or a good investment.

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.

Escrow accounts:

Escrow accounts are a financial instrument in which an asset or escrow money is held by a third party on behalf of 2 other parties that are in the process of completing a transaction. Escrow accounts can hold money, securities, funds, and other assets.

In simpler terms, an escrow account is a third party account where funds are kept before they are transferred to the ultimate party. It provides security against scams and frauds especially with high asset value and dispute-prone sectors like Real Estate.

Using escrow, a buyer can place their funds in a bank-based escrow account which is supervised by a third party. The third-party disburses the funds from the escrow account to the seller only after all conditions in the financial agreement between the two parties have been met. Hence, this proves to be a powerful financial instrument that removes trust-based issues in sectors like real estate.

The escrow system follows a step-by-step timeline which makes transactions speculation-free. The transacting parties can track the movement of funds and progress of the contractual commitment. Since the transactions are conducted under the due supervision of diligent professionals, buyers’ funds and sellers’ offerings remain in secure hands. Additionally, startups and emerging businesses can leverage escrow payment methods to minimize risk for their specific-use transaction cases like procurement, supply chain, professional services, etc.