scorecardresearchInvesting in Indian companies via SPAC: Does it pose any risks for the investors?

Investing in Indian companies via SPAC: Does it pose any risks for the investors?

Updated: 18 Oct 2022, 01:45 PM IST
TL;DR.
A corporation with no commercial activity, established specifically for the purpose of obtaining investment money through an IPO is known as a blank check company or a special purpose acquisition company (SPAC).
A corporation with no commercial activity, established specifically for the purpose of obtaining investment money through an IPO is known as a blank check company or a special purpose acquisition company (SPAC). 

A corporation with no commercial activity, established specifically for the purpose of obtaining investment money through an IPO is known as a blank check company or a special purpose acquisition company (SPAC). 

Indian car rental platform Zoomcar Inc said on Thursday it would go public in the United States through a blank-check merger valuing the combined company at $456 million including debt, as it seeks to expand into new markets, reported Reuters.

While reading this piece of information, you might get stuck at the term, ‘blank-check merger’. What is it?

A corporation with no commercial activity, established specifically for the purpose of obtaining investment money through an IPO is known as a blank check company or a special purpose acquisition company (SPAC). The SPAC acquires, or typically merges with an existing private firm after becoming a public corporation. The sort of firm that the SPAC want to merge with or acquire is not disclosed to investors prior to the merger or acquisition.

How does SPAC work?

Experienced business leaders who are certain that their reputation and expertise will aid them in finding a successful firm to purchase establish a special purpose acquisition company. The founders' notoriety may end up being a selling advantage when seeking funding from investors because the SPAC is simply a shell corporation.

The management team of the SPAC hires an investment bank to handle the IPO when it is issued. Due to the SPAC's lack of performance history or revenue reports, the prospectus focuses more on the sponsors and less on the company's history and revenues. Until a private firm is selected as an acquisition target, all IPO proceeds are kept in a trust account.

The SPAC then seeks out and negotiates a commercial alliance with a private firm, exchanging a portion of the post-merger business for the money it acquired via its initial public offering (IPO) and its position as a publicly listed corporation. Institutional investors are frequently enlisted to contribute additional funds to the combination in exchange for shares of the target business.

Are there any risks associated with the SPAC?

SPACs come with risks for investors, just like any investment. The management of the SPAC's skill in navigating the market of the target firm is one of the primary concerns. SPAC management teams often comprise professionals, and the majority of them have solid investing backgrounds.

However, if SPAC management lacks knowledge of the target firm's market niche, this might have unfavourable effects on both the target company and its shareholders.

The scarcity of information on the target private firm is a further cause for worry. These organisations are not required to provide financial information, which may cause deception. When the private firm joins the SPAC, it will be necessary for it to disclose its financial information, but by then it could be too late for the early SPAC investors.

SPACs have been in use for many years and have frequently served as a last-ditch option for small businesses that were unable to raise capital on the open market. It takes a big leap of faith to invest in shares of a new SPAC, but the rewards can be tremendous. 

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First Published: 18 Oct 2022, 01:45 PM IST