Explained | SPACs and why they have caused a rumble in the market space

SPAC deals have seen a boom in 2020 and 2021 with over 500 companies opting for it to raise funds

The concept of a special purpose acquisition company (SPAC) has been around for over 10 years but it only saw rigourous traction in 2020 with a record number of SPAC deals worldwide. 2021, however, was sweeter as four months in, the record has already broken.

What is a SPAC?

A SPAC or a blank-cheque company, clear from its name, is a vehicle set up solely to raise capital through an initial public offering (IPO), to acquire another company. Presently, these companies do not have revenues or any operations.

In the US, when a SPAC raises money, it is deposited in an escrow account. If this acquisition falls through for some reason or is not finished within two years of the IPO, the money is returned to the investors and the company is delisted.

Read | How US SPACs rocket has failed to take off in Europe

Why are investors gravitating towards SPAC deals?

Big underwriters and investors have thronged these companies in recent years. Many in the market favour these listings over traditional IPOs because they believe that such a company has more certainty over deal terms and pricing as compared to a company going public in a traditional listing.

Investors have also been attracted to these listings due to the star power behind them. Stars lke Shaquille O'Neal, Serena Williams, former TikTok CEO Kevin Mayer, Dell Technologies founder and CEO Michael Dell, VC Vinod Khosla are some of the celebrities involved in SPAC listings.

The US Securities and Exchange Commission (SEC) recently warned investors against indulging in SPAC deals just because famous people were sponsoring them.

The US has seen the most interest. There have only been 10 SPAC listings in Europe in 2020 and 2021 with a total value of about $1.3 billion - figures dwarfed by the United States where 522 such listings have brought in over $300 billion, according to data by Refinitiv.

Read | D-street flooded with IPOs even during pandemic

Have Indian companies done SPAC deals?

India's ReNew Power announced a merger with RMG Acquisition Corp II, a blank-cheque company in March. This SPAC deal will lead to a $1.2 billion IPO of ReNew Power on Nasdaq. Online grocery platform Grofers is also aiming to go public through a SPAC deal. But India is yet to take a formal stand on SPACs.