Deny SPACe

| Updated on March 16, 2021

The regulator needs to think twice about allowing SPAC issues at the IFSC

It is a little surprising that the consultation paper issued by the International Financial Services Authority (IFSCA) seeking the views of the public on the securities that can be listed and traded on the GIFT IFSC includes Special Purpose Acquisition Companies. The regulator of IFSC is not wrong in seeking to expand the array of securities that are traded in the offshore centre but, in its zeal to increase participation, the regulator should be mindful of not eroding the credibility of the centre. SPACs are shell companies that raise money with the intention of acquiring an existing company with the funds raised in the public offer. These companies have no existing business and investors in these issues bet on future acquisitions giving them due returns. There has been a surge in interest towards these companies in recent times with many well-known investors and celebrities backing such issues; these issuances have outnumbered regular IPOs in the US so far this calendar.

SPACs are currently in vogue mainly due to the surging global liquidity that is taking the prices of risky assets to astronomical levels. Of greater concern is that many of these assets have no fundamental value. Cases in point are Bitcoin prices crossing $60,000 recently and crypto art by Beeple selling for close to $70 million. SPACs, too, do not have any intrinsic value at the time of the issue and investors have to rely on the reputation of the sponsor and his expertise to identify the right company for acquisition. While the IFSCA is proposing that the sponsor shall hold at least 20 per cent of the post-issue capital and is suggesting minimum application of $250,000, these measures will not entirely protect investors from risk of loss. If conditions change due to tightening monetary conditions, the appetite for these products will evaporate, causing losses to investors. Also, the SPACs are being given acquisition timeline of three years, to be extended by one more year, which seems too long. If any of the issuers fail to make the intended acquisitions, it may impact the credibility of the GIFT-IFSC. While it is good that the Government is not attempting to introduce these products in the domestic market, it’s best not to introduce this in the GIFT-IFSC either, given that the offshore centre is at a very nascent stage of development.

That said, the IFSCA is right in considering introducing other categories of securities such as securities issued by an unlisted issuer, follow-on public offer of specified securities by a listed issuer or listing of specified securities by a start-up company or an SME, in the IFSC. If the pool of investors at the IFSC increases, it will help domestic entities raise funds easily. Similarly, allowing listing of debt securities including ESG focussed debt securities is also a good idea as it enhances the standing of the IFSC.

Published on March 16, 2021

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