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Current Affairs

SPACs

Date: 23 April 2022 Tags: Miscellaneous

Issue

Regulatory framework for special purpose acquisition companies (SPACs) will soon be notified by the government.

 

Background

The changes will be made based on the Company Law Committee report, which was set up to boost ease of doing business in India.

 

Details

  • SPAC is set up specifically with the objective of acquiring a firm in a particular sector. It is also known as blank cheque company.

  • SPACs raise money through Initial Public Offering (IPO) and money raised will be kept in an escrow account, which can be accessed while making the acquisition.

  • SPACs are basically shell companies but they are sponsored by prominent stars, which make them attractive for raising revenues from public.

 

Conditions

The acquisition of the target company has to be made within two years, failure of which the SPAC is delisted and the money is returned to the investors.

 

SPACs in India

  • RMG Acquisition Corp II, a blank-cheque company, acquired renewable energy producer ReNew Power. This was the first deal involving Indian SPAC.

  • Creation of blank cheque companies is not allowed by Indian regulatory framework under the Companies Act, 2013. 

  • Registrar of Companies can strike off a company if it does not start operations within a year of incorporation.

 

Risks associated with SPACs

  • Usually investor companies create SPACs and then look for target companies. This has benefitted investee firms and limited profits for investors.

  • SPACs have to return back investors’ money in case no acquisition is made within two years of setting up. However, terms and conditions mandate that investors may not get their money back.

  • In many case, celebrities are used to lure potential retail investors in SPACs. In some cases, celebrities also become victims of bad investment.

  • Celebrities have the money to sustain losses from such SPACs but many retail investors may lose their life savings.

SPACs

Date: 25 March 2021 Tags: Miscellaneous

Issue

US Securities and Exchange Commission (SEC) has alerted investors regarding SPACs, or special purpose acquisition companies.

 

Background

The SPACs are used by promoters and investors to take their companies and investments public. This gained momentum last year.

 

Details

  • An SPAC, also known as blank-cheque company, is specific entity set up in order to acquire a firm in a particular sector.

  • SPACs are aimed at raising money from initial public offering (IPO) at a time when it does not have operations or revenues.

  • The raised money from the public is kept in an escrow account, which can be used while making the acquisition.

  • SPAC is delisted and money is returned back to investors if the acquisition is not made within two years of the IPO.

  • SPACs have become attractive even though they are basically shell companies because of the people sponsoring the blank-cheque company. 

 

SPACs in India

  • Indian regulatory group has not taken an official stand on allowing the listing of SPACs. However, SEBI has formed an expert committee to study the feasibility of bringing SPACs under regulation.

  • Indian regulatory framework does not allow formation of blank cheque companies. Companies Act 2013 allows the Registrar of Companies to remove the company from the list if it does not start operations within a year.

 

Risks involved

SPACs are expected to return back the money to investors if no merger is made within two years but certain terms and conditions can prevent investors from getting their money back.