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Piping Hot From Wall Street

Piping Hot From Wall Street

Indians are looking to invest in new-age companies in the us via SPACs; SEBI considers local options

Illustration by Raj Verma Illustration by Raj Verma

Dearth of investment options drives people to hunt for newer opportunities. This is what opened the gate to US equities for Indian investors. Now, investors have found another route to take exposure to fresh global themes and new-age tech plays - SPACs, or special purpose acquisition companies, which have become quite a rage in developed markets.

SPACs are basically 'blank cheque companies' that get listed on US stock exchanges with an objective of acquiring private companies. They are supposed to acquire their target within two years. If you hold SPAC shares until the merger, you get a proportional stake in the merged entity. This gives investors early access to new-age companies, which are finding this a convenient way to get listed on US exchanges, avoiding the time-consuming initial public offer (IPO) process.

India Warms Up to SPACs

Global investment platform Globalise says it has seen a fair bit of interest in SPACs. "Approximately 5 per cent of AUM is invested in SPACs. The most popular SPACs are Switchback Energy Acquisition Corp (completed merger with Chargepoint, an EV charging network), Foley Trasimene Acquisition Corp II (announced merger with Paysafe, a global payments provider), Churchill Capital Corp IV (announced merger with Lucid Motors, a manufacturer of luxury electric vehicles)," says Viraj Nanda, CEO, Globalise.

Stockal, an investing platform, has seen 3-5 per cent of its users invest in SPACs in the last four-six months. "Investors have traded $4-4.5 million in SPACs in the timeframe. Social Capital Hedosophia Holdings Corp. V Class A, Churchill Capital Corp IV Class A, Foley Trasimene Acquisition Corp. II Class A are seeing highest interest," says Vinay Bharathwaj, Co-founder and Co-CEO, Stockal Inc.

On Winvesta, a little less than 5 per cent users are invested in SPACs. "SPAC share is less than 1 per cent of AUM. This has fallen by 70 per cent since the February-end as the SPAC market faced headwinds in March. The top three SPACs by AUM are CCIV (Definitive Agreement with Lucid Motors), IPOE (Definitive Agreement with SoFi) and RTP (Definitive Agreement with Joby Aviation)," says Prateek Jain, Co-founder, Winvesta.

How SPACs Work

SPACs can be floated by experienced management teams or high net worth individuals, called sponsors, with some nominal capital. They usually hold 20 per cent stake; 80 per cent is offered to public shareholders via an IPO. One unit comprises a share and a warrant. Warrants give right to vote on converting your SPAC holding into shares in the new entity. Initially, shares and warrants trade as one unit. Closer to the merger target being announced, some SPACs may announce that the two will trade separately.

The money raised through the SPAC goes into a trust account which earns a risk-free rate. Once the target is identified, investors are given an option to sell their shares or warrants and get their money back. If they stay invested, they get shares in the merged entity.

If the SPAC fails to identify a merger target within two years, it is liquidated and money returned to shareholders. "Essentially, investors have nothing to lose as the money is parked in a trust account that gives you some assured return, while they earn profits if their shares and warrants rise in value," says Nanda of Globalise.

What's in it for Indian Investors

Indian investors can invest in SPACs only after its public listing. "The process for investing in SPACs is exactly the same as for individual US stocks; SPACs are nothing but publicly traded companies," says Nanda of Globalise.

The purchase price of a SPAC unit is typically $10, which consist of a share with $10 face value and a warrant. Since these are 'blank cheque companies', prices do not move spectacularly until a merger target is announced. Then, the price may move up or down by 50-60 per cent in a day. "Once the merger is announced, if you don't want to maintain an ownership in the target company, you can sell your warrant in the market. If the merger does not come through, the value of your warrants becomes zero. But you will still earn a risk-free return on your investment by redeeming the share. So, there is no downside of investing in SPACs unless the acquired company does not live up to the expected potential after listing," says Nanda of Globalise.

However, before you jump on to the SPAC bandwagon, understand it well. Evaluate the credibility of the sponsor and its track record of finding acquisition targets. Lately, well-known celebrities in the US such as tennis star Serena Williams and Basketball Hall of Famer Shaquille O'Neal have floated SPACs. The SPAC mania has even forced the US market regulator, the SEC, to issue a warning to investors. "Celebrities, like anyone else, can be lured into participating in a risky investment or may be better able to sustain the risk of loss. It is never a good idea to invest in a SPAC just because someone famous sponsors or invests in it or says it is a good investment," said SEC in a notice.

SPACs are not for everyone. "There are a few things that investors should consider before selecting a SPAC. The most important is the management team. The other things are the size of the SPAC (bigger ones are usually better), target sector, sponsors investment, warrant structure and interest paid while the money is in the trust account," says Jain of Winvesta. At the time of the merger, a SPAC investment can be as risky as investing in an IPO.

Steve Sosnick, Chief Strategist, Interactive Brokers, says if you buy early, your losses are muted. "SPACs are like call options because you have limited downside and unlimited upside. So, there is something appealing in that. But, in the ongoing frenzy, you have SPAC managers flushed with cash under pressure to get a deal done. That leads to some bad deals with listed entities underperforming in the market."

SPACs in India

SPACs are not allowed in India. Recently, power producer ReNew Power signed an agreement with the US-listed SPAC RMG Acquisition Corporation II to list on Nasdaq at a valuation of $8 billion. Grofers and Flipkart are also looking to go public via this route. "VC investor Ravi Adusumalli is preparing for a SPAC in the US to acquire an Indian tech company," says Jain of Winvesta.

Meanwhile, market regulator Sebi is also looking at allowing SPACs in India. "Sebi has set up an expert group to examine the feasibility of allowing SPACs in India. Similarly, the IFSCA has also issued a consultation paper for a framework for listing of SPACS. Going forward, we may see SPACS being permitted to list in India. However, investors need to understand the product and make investment decisions based on their risk appetite and applicable regulations," says Karan Marwah, Partner and Head - Capital Markets advisory, KPMG in India.