SPAC in India: Let's not tempt small investors with more mirage

“Private equity is an alternative investment class and consists of capital that is not listed on a public exchange. Private equity is composed of funds and investors that directly invest in private companies, or that engage in buyouts of public companies, resulting in the delisting of public equity,” says Investopedia.

In other words, private equity (PE) is meant for high net-worth individuals (HINs) and venture capitalists (VCs) who can sniff quick success and move in quickly to acquire a company, make a quick buck and exit and move onto another similar rapid-fire corporate action. Such rapid-fire action includes cutting the deadwood that often is identified with bloated staff. 

Little wonder, the entry of PE rings alarm bells for both employees and customers. Quickness or fleet-footedness in other words is their hallmark. Disruption is what their critics charge them with though. Be that as it may.

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The American VC and PE ecosystem is conducive to risk-taking to the point of indulging in brinkmanship. Thus was born the seemingly oxymoronic construct – Special Purpose Acquisition Companies (SPAC) – which raise funds from the public through IPOs and go on to do all those things which PE firms have all along been doing. 

How SPACs work in US

The following EY publication brings out succinctly how SPAC works in the US:

“SPACs raise capital from investors via an initial public offering (IPO). Funds are held in trust until a suitable target is found, at which point investors can vote to either accept or reject the merger. Shareholders can also redeem their shares in the event they’re not interested in participating in the proposed merger. SPACs generally have two years to find a target; if they don’t, then money is returned to investors.”  

The Indian capital market regulator, SEBI, which is often inspired by the US precedents and practices, is itching to emulate it. But the following pertinent issues need to be addressed squarely:

1. Indian public have already burnt their fingers by reposing their faith in IPOs made at mind-boggling premiums under the 100 per cent  book-building route in which the track record of profits is immaterial so long as the future in the perception of merchant bankers is rosy. New-age companies, flaunting technological prowess, wear losses on their sleeves on the facile and self-serving ground that such losses are harbingers of profits. Touché!
2. 2. The US law allows redemption of investments if the shareholders are not enamoured of the acquisition made. Does the Indian law allow such redemption? The answer is No. India did have a voluntary safety net mechanism that allowed promoters to stick their neck out and offer to buy out the small investors (holding not more than 1000 shares) at the offer price should the market price during the first six months dip below the offer price. The response predictably was lukewarm from company promoters.  SEBI decided in May 2018 to cast the baby out with bathwater instead of making it mandatory. Buyback of shares is allowed but that is generally in lieu of dividends and not under such dire circumstances as investors not finding the investments up to their taste.

3. SPAC, which admittedly doesn’t even have a blueprint or contours of its project ready, seeks public funding (a blank cheque as it were) on the promise of finding a target and milking it or turning it around. This is akin to naming a baby even before it is born. To be sure such risk-taking is perfectly kosher for PE, but the million-dollar question is should the SEBI expose our small investors to such extreme adventurism?

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Greener pastures

Foreign VCs seek action offshore once opportunities ebb back home. The policy wonks in India should not be swept off their feet by the US precedent or pressure.  It is not as if the novelty has been a resounding success in the US as brought out by the following:

“While these assets were introduced in the US in 2003, the number of annual issuances was less than 20 in most years prior to the pandemic. But 247 SPAC IPOs were made in 2020 followed by another 613 in 2021, as the risk appetite of investors grew along with excessive liquidity in the system. But investors have grown wary this year with many of the SPACs trading below their offer price. There have also been reports of SPACs investing in companies with unsound business models and poor revenue visibility,” said BusinessLine in an editorial.

Also read: In the world of IPO, Class of 2021 breaks all records

Let us not believe that every change is progress and everything the US does must be dumbly followed by us. At any rate, India is not yet ready for casting the gullible public in the role of venture capitalists albeit in the form of small cogs in the wheel. Recently, SEBI’s conscience was rightly troubled and it upped the ante in the wake of the series of IPO debacles on the bourses and wanted new-age companies to explain in their offer documents their source of optimism like footfalls or registration on their websites. It is another matter that there was resentment even against these nebulous and wishy-washy disclosure norms.  

How is SEBI going to reconcile to the regime of deafening silence on the prospects front? Footloose capital can by all means seek investment avenues but small investors’ capital should not be at stake.

While uncertainty about return on investments is what investment in equity is all about, uncertainty about what the investment itself is, is something small investors should be spared of.

(The writer is a CA by qualification, and writes on business, consumer issues and fiscal laws.)

(The Federal seeks to present views and opinions from all sides of the spectrum. The information, ideas or opinions in the articles are of the author and do not necessarily reflect the views of The Federal)