There are growing indications that Indian policymakers are seriously examining the feasibility of allowing Special Purpose Acquisition Companies or SPACs to list and trade on domestic exchanges. This is rather disconcerting. Recently, the Securities and Exchange Board of India (SEBI) informed the Parliamentary Standing Committee on Finance that it was in the process of finalising a consultation paper on allowing the listing of these securities on domestic onshore exchanges. A sub-group of the primary market advisory committee is engaged in this exercise. The Company Law Committee report had also recommended introducing an enabling provision to allow SPACs to be launched in domestic markets. Policymakers will however do well to go slow in this regard, for these are highly risky vehicles. A SPAC, as the name suggests, is a shell company that raises money through an IPO with the intention of acquiring and merging another company into itself. These ‘blank cheque companies’ are not supposed to specify the target companies in the offer document, but they have to invest the IPO proceeds within a specified period. In other words, SPACs do not have any intrinsic value at the time of the public offer and there is no valuation metric that can be used to price the offer, besides the experience of the sponsor of the company. The selling point for these securities is that it allows the target companies (companies merged into SPAC) to access public money without having to go through the rigmarole of a public offer — but it is moot whether that is desirable.

Indian policymakers seem to be influenced by the boom in SPAC issuances in the US. 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. There is no need for Indian regulators to emulate the risky fund-raising models tried out in the advanced markets. Retail investors in India are more vulnerable; a large number of them are not aware of the risks in equity investing, having entered equity markets in the last two years.

Last July, the International Financial Services Authority in the GIFT City had allowed SPACs to be listed on exchanges in the Indian IFSC. But there has not been much action on that front so far. Allowing these vehicles on the IFSC is not recommended either, as a fraudulent issue can erode the credibility of the offshore centre. But this is a lesser evil, compared to allowing them on the domestic exchanges. It would be best to put SPAC listing on domestic exchanges on the back-burner for now. If the regulator really wishes to go ahead, it should set the minimum investment in IPO and trading lot size really high, say, at least ₹5 lakh so that the uninformed, small investor is kept out. The risks in SPACs are on par with alternate investment funds and it is best to keep retail investors away from them.

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