India’s stock market has witnessed a major transformation with Byju’s, the leading edtech firm in the country, announcing its public listing as a part of a Special Purpose Acquisition Company (SPAC). The deal, one of the largest ever in Asia’s IPO space, values Byju’s at $48 billion and shows how India has warmed up to this form of fast-paced listing vehicles.
The SPAC is an alternative route for companies looking to go public by directly merging with an already listed ‘blank-check’ or shell company. This process bypasses conventional initial public offerings (IPOs) which require time-consuming financial disclosures and approval from regulatory bodies. In this article, we will look at how Byju’s SPAC impacts India’s IPO market by assessing its advantages over traditional IPOs and the key challenges it faces.
Overview of Byju’s SPAC
Byju’s SPAC is the first Indian company to enter the US stock market through a blank-check company. This new type of company structure was designed to create a faster and more efficient way for businesses to go public without going through the traditional IPO process.
This recent move by Byju’s has sparked conversations about its potential impact on India’s IPO market, and this article will cover the details.
What is a SPAC?
A SPAC is a Special Purpose Acquisition Company, basically like a blank check company. It allows investors to invest in a purpose-driven shell company with no active operations or assets of its own, to allow it to buy out an existing private company. This is known as a “reverse merger” transaction.
The advantage of a SPAC over other methods of going public is that it provides an alternative for companies that otherwise would not be able to access public markets through an IPO (Initial Public Offering). A SPAC also presents more flexibility in timing, structure and financing—the target company can remain private until after the deal’s closing, thereby potentially avoiding some regulatory scrutiny.
Byju’s SPAC or BSWG proposes to purchase three Indian companies which Byju Raveendran wholly owns – Eureka Mobile Private Limited, Think & Learn Pvt Ltd and WhiteHat Jr Technologies Pvt Ltd – and then merge them into one combined entity. The newly formed entity will go public through a listing on the US Stock Exchange through BSWG’s Nasdaq ticker symbol ‘BYJVU’
Once shareholders approve, existing venture capital backers and new retail investors can publicly sell their stake in this proposed combined entity on Nasdaq at market value. If successful, this could set off a trend in India’s IPO market as more similar reverse Mergers happen via SPAC companies led by well-known entrepreneurs in India such as Byju Raveendran.
How did Byju’s SPAC impact the IPO market in India?
Byju’s, India’s largest educational technology startup, recently completed its listing in the US stock market through a Special Purpose Acquisition Company (SPAC). The deal turned into India’s biggest-ever listing valued at $48 billion. A SPAC or blank check company is formed to raise capital from investors for acquisitions or mergers with private companies.
The route of listing through SPAC used by Byju’s sent shock waves across the Indian IPO market as it represented a more efficient and quicker way of raising funds than traditional IPOs. Byju’s raised nearly $2 billion through this deal, unprecedented in Indian capital markets. The listing was also completed at a comparatively higher valuation than what Indian markets can offer as it seemed influenced by Silicon Valley dynamic valuations.
Byju’s acquired Aakash Educational Services Ltd., one of India’s largest offline coaching services company, further expanded its presence and opened access to a much wider customer base. Consequently, its potent combination of online and offline learning capabilities gave impetus to its future growth prospects attracting investors in large numbers. The share price has soared about 16% since the deal’s closure in April 2021 proving that long-term investors are expecting substantial upside potential from this investment and IPOs such as Byju’s SPAC in times to come.
However, Byju’s thriving success amid adverse public market conditions highlights some pitfalls investors face during IPOs via traditional routes backing up more traditional forms of strategic planning such as pursuing private equity sources instead of going public directly after primary rounds. On one hand, where it has opened up new options for large unlisted companies backed by venture investors; on the other hand, it made them overlook flaws with simultaneous placements consisting both institutional offers & retail offers happening at much lower valuations than even their previous round values due to risk perception related factors like illiquidity & long lock-in period no matter how promising the current businesses might be for investor interest over time & scale up potential along with extraordinary value unlocking prospects for majority shareholders.
Byju’s SPAC turns into India’s $48 bln IPO problem
The Byju’s SPAC, or Special Purpose Acquisition Company, is reshaping India’s IPO market with a potential $48 billion market cap.
As the first SPAC to go public in India, Byju’s is setting a precedent and creating waves in a market that hasn’t seen an IPO this big in eight years.
This article explores the implications of this historic move and its impact on the Indian IPO market.
Increase in SPACs
Recent years have seen a dramatic rise in SPACs, or Special Purpose Acquisition Companies. After the US stock market took off in earnest towards the end of 2020, IPO fatigue has become an issue with investors increasingly choosing to funnel their cash into SPACs instead. This trend may be mirrored in India’s IPO market as investors seek higher returns and more favorable tax treatment.
The impact of this shift is largely being felt through Indian online education company Byju’s which is set to debut on the Bombay Stock Exchange later this month after revealing it has raised over $500 million through a SPAC at a valuation of $48 billion. This display of increasing investor confidence bodes well for India’s economy and IPO market which has been relatively subdued due to economic challenging conditions despite strong long-term growth prospects.
Increased appetite for IPOs from everyday investors combined with fresh capital from SPACs could help push India’s IPO market back onto positive trajectory that analysts have forecasted over recent years despite coronavirus-related setbacks throughout 2020. But, unfortunately, if too much investment were to flow into one avenue such as seen by Byju’s case it could create an environment close to overheating; newer players may find it hard to survive amidst inflated valuations brought on by such hype.
Impact on Indian investors
With the announcement that Byju’s, India’s leading ed-tech company, is set to become a publicly listed company through a SPAC (Special Purpose Acquisition Company) deal with US-based Oaktree Capital Group, there has been some skepticism about its potential impact on the Indian IPO market.
Byju’s taking this route has thrown a spanner in the wheel for several non-unicorn companies expecting to launch their IPOs. Many mid-sized companies may feel that their IPOs will struggle to raise sufficient funds if their revenues and valuations do not match Byju’s. It is generally believed that other startups will now be forced to wait or restructure their offerings to stay competitive amidst rising valuations expectations.
On the flip side, investors may find themselves spoilt for choice as these SPAC deals may bring back investor confidence and appetite in certain tech activities after years of subdued market activity. This can create further opportunities in core sectors like healthcare, food delivery, fintech and cloud services due to increased access to capital and foreign institutional inflows.
The recent buzz around SPACs could also mean increased pressure for more traditional Indian corporations who were until now banking on IPOs as an exit route for venture capitalists and private equity investment firms. With Indian startup founders now increasingly turning towards such SPACs due to higher valuations and lesser disclosures requirements compared to traditional listings on domestic exchanges, it remains to be seen how this shift will play out over the longer term and whether it could erode Indian investors’ faith in public offers going forward.
Impact on Indian companies
The Indian IPO market has seen rapid growth in the last few years. Companies are increasingly looking to go public to raise capital while gaining access to a wider pool of shareholders. This can provide valuable access to capital that, in turn, can help businesses scale up and become more competitive. Going public also provides greater visibility and more effective communication with customers and other stakeholders.
However, the process of going public is complex and involves significant financial and opportunity costs for companies. Companies wishing to go public must conduct extensive research, develop fundraising strategies, appoint new directors or advisors, etc. Moreover, these companies are subject to stringent regulations from the Securities Exchange Board of India (SEBI), which increase their compliance burden significantly. Lastly, new investors may not be familiar with the multiple risks associated with investing in equities or have confidence in their ability to assess them accurately.
These additional costs and risks associated with listing on an exchange may discourage smaller companies from tapping into equity markets and limit their business opportunities. To lessen this impact on Indian enterprises, SEBI recently proposed guidelines which relax certain criteria related to minimum issue size, free float requirements, and other disclosure norms to make it easier for SMEs (Small & Medium Enterprises) and start-ups to raise funds on stock exchanges. This is expected to open up the IPO market further while providing greater access to capital for smaller companies that might otherwise be unable to tap into such sources of funding due to various reasons including key company personnel not having enough experience managing listed entities or lack of resources required for meeting stringent disclosure requirements etc.
In conclusion, the initial public offering of Byju’s is a landmark event that will have far-reaching implications for the Indian IPO market.
The company, which enjoyed much success in its private fundraising efforts, received approval from the market regulator earlier this year to go public via a unique SPAC (special-purpose acquisition company) structure.
Byju’s IPO listing has highlighted the potential drawbacks of this type of investment vehicle, and exposed some of India’s wider stock market problems. It has also brought attention to the issue of retail investors in India, who were slighted by an allotment system that favored larger investors and corporate entities.
Going forward, it will be interesting to see whether other Indian companies follow suit with a SPAC listing, or whether regulators opt for stricter restrictions.
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