After almost 30 years of moving towards a capitalistic market model, India still has a long way to go. Efficient allocation of capital, risk taking, animal spirits: we don’t truly get this. Banking system is stuck in NPA mess, which the bankruptcy law IBC has not been able to make a significant debt. Equity markets have become very difficult to raise money for a very long time. The main exchanges – NSE and BSE – are able to support 20-30 IPOs in a year. The SME exchanges have seen good listings, 50+ on each exchange. However, the amount of capital raising there is miniscule. One hears that many of the listings don’t actually end up raising real external capital. The objective sometimes is to make the share price run post-listing, and then to perpetrate abnormal market activities.
In contrast, one can’t help admire the vitality of the US markets. In a time when Covid is contracting economies around the globe, a high risk form of fundraising is thriving on the US public markets. This is IPOs for what is called special-purpose acquisition companies (SPAC) or blank-cheque companies. These are new companies formed with the intent of funding an acquisition, which is not identified at the time of the IPO. In other words, these are companies with no revenue, only an intent to acquire, that raise money from public markets.
2020 is going to be the banner year for SPAC IPOs. 50 IPOs have raised USD19B so far, almost 50% more than the previous best seen in the entire 2019. 20 more SPAC IPOs are already lined up. So 2020 will most likely end up doubling the total amount raised by these companies.
To get an idea of how speculative this is: many of these companies take 1-2 years to identify and close an acquisition. Till such time, the money raised sits in a trust account doing nothing.
For example, Tenzing Acquisition Corp. (TZAC), a SPAC that raised USD55m in Aug’18, finally announced its acquisition now, in July’20. TZAC’s stated goal was to acquire a company with business operations in India. It has announced a merger with Reviva Pharmaceuticals, Inc. (“Reviva”), a California-based clinical stage pharmaceutical company developing therapies that address unmet medical needs in the areas of central nervous system, cardiovascular, metabolic, and inflammatory diseases. Reviva’s promoter is Dr Laxmikant Bhat.
Share prices of SPAC companies that found a target have been zooming on US exchanges. Big name underwriters like Credit Suisse, Goldman, Citigroup, Bank of America are leading the offerings. Size of the offerings has increased this year. The largest SPAC so far, Churchill Capital Corp III, raised $1 billion in Feb’20.
This brings to the issue: Are Indian markets short on innovation in funding instruments and IPO types? Is our regulator Securities Exchange Board of India (SEBI) thinking about innovation?