Castler Escrow

SPACs in India - A Boom in Waiting

Adopting unconventional ways of raising money for professionally financing business ventures is bound to have a significant impact on the national (and consequently global) economy. As much as unconventional is novel, it also asserts precarious, untested waters. But is it justified to lose out on massive profit potential due to uncertainty?

Since the onset of the COVID-19 pandemic, Special Purpose Acquisition Companies (SPACs) have been making headlines in the US about the huge amounts of money they generated, in a relatively short period of time. According to Forbes, since January 2021, SPACs in the US have already raised more money than US SPACs did in all of 2020.

What is an SPAC?

Essentially, an SPAC is a company created with the purpose of merging with a different company after raising a pre-decided minimum amount of funds. They are listed on stock exchanges and are provided a specific amount of time by the monetary regulatory body of the country for raising funds. The SPAC has to acquire a company within this timeframe, else it is diluted and the money is returned to the investors. The popularity of SPACs in the US is no surprise – the positives are many-
  • Cheaper method – while gaining visibility through an IPO can be expensive, SPACs save on this cost.
  • Quick realization – IPOs can take years to realize; an SPAC, however, may achieve its funding targets in a couple months.
  • Risk-free – investors view SPACs to be a safer investment option than IPOs as the former hold funds in escrow accounts till the merger carries through.
  • Risky? Not Really

    There exist, however, some contentions that SPACs might be a riskier option for potential investors because the names of the ultimate entities that these SPACs would merge with are not disclosed beforehand. This is countered by the fact that investors put faith in a trusted third-party (in the form of an escrow company like Castler), which makes the deal(s) safe. The benefits are many-
  • Funds are deposited by investors into an account that is created simply for the purpose of holding the money. The essence of an escrow account is guaranteeing safety and security while making transactions.
  • In case adequate funds are not raised for the SPAC within the given time period, all the amount due to the investors is returned. No fraud possible.
  • The interests of the issuers of an SPAC are also protected. The possibility that the funds being raised may get stolen or wrongfully siphoned is negated when an escrow account is used.
  • The escrow account company holds responsibility and is accountable for the safety and security of the funds. By extension, the company is also responsible for ensuring a stress-free fundraising and investing process for all the stakeholders of the concerned SPAC.
  • The terms of agreement signed between the issuer and the investor(s) also add to the security of the funds held in an escrow account. The issuer cannot change these terms at will. In-case the issuer wants to make changes to the agreement, approval from the investor(s) will be sought.
  • The safety net offered by the presence of an escrow account governing the holding of funds propels the raising of a huge amount of capital. Investors feel increasingly confident about contributing to the SPCA and millions of dollars are raised in months. Safety leads to speed.
  • SPACs in India

    In India, the existence and use of SPACs is not blatant. The Reserve Bank of India (RBI) is the governing body of the banking system in the Indian economy and is currently looking into the viability of the use of SPACs along with the Securities and Exchange Board of India (SEBI), which is the regulatory head of the stock exchanges of the country. The speculation is that there should be little reservation in allowing the operation of SPCAs in the subcontinent. With the potential of raising big money fast, promising businesses with huge growth potential can take off quickly and successfully. This would result in a direct surge in employment, higher salaries, and improved global footing of Indian companies.

    A Profitable Loophole We Could Do With

    Another impact of approving SPACs to operate in India is related to the growth and surge of more and more unicorns. Companies solving common problems and dilemmas through new and innovative solutions contribute directly to the improvement of society’s quality of life and increased welfare. Quite recently, 6 new Indian start-ups grew to cross the $1 billion valuation mark in 4 days, including Cred, Groww, and Meesho. The impact of their rise is certainly not singular but multifold. With the possibility of utilizing SPACs to raise huge amounts of capital in a short time, the rise and number of unicorns will be greater and faster.
    Although the operability of an SPAC or a reverse merger is in-fact the capitalization on a loophole in the formal capital-raising system, its multiple benefits satisfy many aspects related to business and economic growth. This possesses the potential to translate into social and societal growth as well. The fluke is conceived as unsafe, but the accusation is countered with the presence of an escrow account in place. Investors do not have to feel inhibited and businesses do not have to feel doubtful of their success. If SPACs are allowed to function freely in India (albeit with some strict regulations, certainly), the Indian economy can hit new heights that we might not even be able to conceive entirely at the moment.

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