What Are Special Purpose Acquisition Companies?

What Are Special Purpose Acquisition Companies?

Special Purpose Acquisition Companies (SPAC) an alternative to traditional IPO have been quite popular among investors during the pandemic. Let us understand in brief on how they operate.

Crux of the Matter

What Are SPACs?
Special Purpose Acquisition Company (or SPAC) is created solely for raising capital via an IPO for purchasing another company. Typically, it is established by investors who are experts in a particular industry domain.

What Is So Peculiar?
The founders usually have one target acquisition – which is not disclosed to avoid lengthy disclosures. Thus, SPACs are also known as Blank Cheque Companies since the investors have no clue where the money will be invested.

How Does It Work?
A SPAC raises money through IPO by selling shares (typically at $10 each). Along with it, a warrant is sold that gives investors preference to buy more stock at a fixed rate in future. The money raised via IPO is kept in an interest bearing trust until one of the two things happen:

  • The sponsors identify the target and acquire it or buy a stake in it using the funds raised. If the target is an unlisted firm, it becomes public via SPAC’s acquisition.
  • The SPAC is unable to find a company to merge/acquire in a time span of 2 years (subject to change) – resulting in its liquidation.

SPAC v/s IPO
Traditional IPOs are subject to:

  • Heavy regulations
  • Investor scrutiny
  • Take 4 -6 months to complete
  • Need to hire underwriters, do roadshows, pitch meetings, etc.

SPACS:

  • Quick listing possible due to no scrutiny
  • More like shell companies
  • Rely on the reputation of sponsors
  • Sponsors usually receive 20% of the target’s shares at a heavily discounted price .

Significant SPACs

  • Bill Ackman raised $4 billion through its SPAC Pershing Square Tontine Holdings Ltd.
  • Chamath Palihapitiya’s (former Facebook executive) Social Capital Hedosophia Holdings acquired a 49% stake in Virgin Galactic in 2019.

Curious to know how IPOs work? Read here

Curiopedia
  • A reverse merger or reverse IPO is the acquisition of a public company by a private company so that the latter can bypass the lengthy and complex process of going public. An IPO through a SPAC is similar to a standard reverse merger. SPACs are essentially set up with a clean slate where the management team searches for a target to acquire. This is contrary to pre-existing companies going public in standard reverse mergers.
  • According to an industry study published in January 2019, from 2004 through 2018, approximately $49.14 billion was raised across 332 SPAC IPOs in the United States. NASDAQ was the most common listing exchange for SPACs in 2018, with 34 SPACs raising $6.4bn. 
  • SPACs compete directly with the private equity groups and strategic buyers for acquisition candidates. The tightening of competition between these three groups could result in a bid for the best company and possibly increase valuations.

Byju’s Deceitful Practices

Byju’s is yet again in the news but not for good reasons this time. There have been many complaints regarding its shady practices around getting new users and financing the education. Let us look at some of them and see how the EdTech major is reportedly exploiting the market.

Crux of the Matter

What Happened?
Recently, there have been a lot of complaints about how Byju’s tends to trap parents into getting a loan for subscribing to their educational plans.

The Process

Sales Pitch

  • Byju’s’ Business Development Associates are known for their artful sales pitches.
  • Each speech would convey that the parents need to be more responsible for their child’s future and that they need to act now for the same.

Product Offering

  • The BDA position the product to be like a scholarship, by offering them at discounted prices.
  • It makes parents believe that their child is exclusively selected from a bunch of children.
  • The scholarship offer is availed for a very short period, thus luring the parents to make a hasty payment.
  • The subscription amount EMIs are then financed through third party institutes like NBFCs or Banks.

The Payment Medium

  • They also ask for Aadhar & PAN Card in order to get CIBIL & Bank details for automated EMI deductions.
  • EMIs are received through monthly instalments of Credit Cards or Electronic Clearing System.

The Trap

  • Before the parents know, the monthly amount is automatically debited post one-time authentication.
  • In more than 50% of the cases, parents had no clue that they were taking a loan.

Trial Period Frauds

  • In quite a few cases, Byju’s have dishonored the cancellation request made by the parents.
  • Some parent has complained they never received the requested refund.

Other Complaints

  • Give access to initial classes and then later complain of network issues.
  • Untrained instructors – the mentorship promises made during the sales pitch were not fulfilled.
  • Tie up with schools and make the faculties force the students to take up courses offered by Byju’s

Did you hear about Byju’s latest acquisition of Aakash Institutes for ₹7300 crores? If not then read about it here.

Curiopedia
  • Amazon India recently launched Amazon Academy, a rebranded version of its IIT JEE preparation app JEE ready. India’s online education sector has been one of the biggest beneficiaries of the Covid-19 pandemic-induced shutdown in the country.
  • Sales process engineering is the engineering of better sales processes. It is intended to design better ways of selling, making salespeople’s efforts more productive. It has been described as “the systematic application of scientific and mathematical principles to achieve the practical goals of a particular sales process”.
  • The point of sale (POS) is the time and place where a retail transaction is completed. At the point of sale, the merchant calculates the amount owed by the customer, indicates that amount, may prepare an invoice for the customer, and indicates the options for the customer to make payment.

Why Are Mutual Fund Investors Pissed?

Why Are Mutual Fund Investors Pissed?

Mutual Fund investors are vexed at the NPCI as its newly adopted system resulted in the piling up of orders. As a result, investors missed out on potential gains in the post-budget market rally. Investors are even demanding compensation for the potential gains! Let’s find out what happened.

Crux of the Matter

The Hitch

  • National Payments Corporation of India (NPCI) upgraded its system on January 31.
  • Since then, issues with the implementation of Mutual Fund orders started popping up.
  • Money is deducted through the digital gateway but units ordered by MF investors are either received late or not received at all.

What’s The Issue?
Step A
With increasing volume requirements and industry demands, NPCI updated its National Automated Clearing House (NACH) infrastructure on Jan 31. The NACH mandate deducts money from the investor’s account & then transfers it to the MF Scheme.

Step B
The planned migration was not implemented successfully. The amount was deducted without the units getting transferred to the account.

Step C
The upgradation coincided with SEBI’s new Net Asset Value (NAV) rules from February 1. SEBI’s new rules for orders above ₹2 lakh allow for the allocation of assets only when the fund leaves the bank settlement account and hits the Asset Management Company’s (MF issuer) account.

Step D
Hence with the persisting glitch, approximately 5 – 7 lakh transactions have piled up at payment gateways. Moreover, Sensex and Nifty have gained about 9 – 10% since Union Budget, making Mutual Fund investors more restless.

Who Is Accountable?
Side I:
The Mutual Fund investors are seeking compensation from fund homes on lost income for not receiving unit allotments on time.
Side II:
The fund home CEOs claim that unit allocation was not possible since the Mutual Fund never received the money.

Parties Involved

  • Investor’s Financial Institution.
  • Mutual Fund & its Payment Gateway
  • NPCI

Status Quo
NPCI released a statement that it is working with fintech companies and banks to resolve the glitch in its upgraded clearing system.

Curiopedia
  • The first modern investment funds were established in the Dutch Republic. In response to the financial crisis of 1772–1773, Amsterdam-based businessman Abraham van Ketwich formed a trust named Eendragt Maakt Magt (“unity creates strength”).
  • At the end of 2019, mutual fund assets worldwide were $54.9 trillion, according to the Investment Company Institute.
  • The Vanguard Group, Inc. is an American registered investment advisor based in Malvern, Pennsylvania with about $6.2 trillion in global assets under management, as of January 31, 2020. It is the largest provider of mutual funds in the world.

What Are Bad Banks?

What Are Bad Banks?

Rising Non-Performing Assets (NPAs) are no less than a financial pandemic hovering upon the Indian Economy for quite a long now. Finally, in what looked like a concrete measure to address the NPA issue, the government announced the establishment of a ‘Bad Bank‘. We know the term ‘Bad Banks’ is just being tossed around like any other word, but in this story, we will simplify the term for you and see if it can solve the NPA crisis.

Crux of the Matter

Simplifying The Term
In Budget 2021, the FM had proposed setting up a government backed Asset Reconstruction Company (ARC) for buying the stressed assets from the banks.

Such ARCs that ‘isolate high risk and illiquid assets’ like bad loans are called ‘Bad Banks.’

In simple terms, the proposed Bad Bank is a financial enterprise set up to purchase Bad Loans (Non Performing Assets) from other Banks.

Why The Setup?
As of September 2020,
9.7% of PSB loans, and
4.6% of private sector banks’ loans were NPAs.

The total NPAs amounted to ₹7 lakh crores!

The aim of the Bad Bank is to ease accounting burden of NPAs on banks by clearing their stressed balance sheets

How Will It Work?
1. ARC will buy NPAs from Banks.
2. This newly set up ARC will then be a holding company to an Asset Management Company (AMC).
3. The AMC in turn will recover money from the acquired NPAs by selling them.

Bankers estimate a corpus of ₹15,000 crores will be required for buying loans of ₹3 lakh crores. The funding is expected to be provided jointly by the Government and Banks.

Funding Mechanism
The ARC will be paying 15% cash upfront to the Banks. For the remaining 85%, a Security receipt will be issued by the ARC, payment of which would depend upon the amount recovered from selling the NPAs.

The Pros
– Consolidates all the bad loans under one single entity further easing the recovery hurdles.
– The goal is not to make a profit but to lessen the burden of the bank by arresting their losing market share.

Critics
– It is a mere shifting of assets from one entity to another – just accounting wizardry.
– Indirectly, it may incentivize commercial banks to operate recklessly given the safety net of Bad Banks that will keep absorbing NPAs.
– This is not the first time an ARC has been set up (although it’s a first govt ARC), so the historical data suggests that banks were able to recover only 30% of the amount of NPAs sold to ARCs.

Did you know that cabs were expected to be the reason for the increase in NPAs during the lockdown? Strange, right? Then quench your curiosity here.

Curiopedia
  • A special-purpose entity is a legal entity created to fulfill narrow, specific or temporary objectives. SPEs are typically used by companies to isolate the firm from financial risk.
  • The first bank to use the bad bank strategy was Mellon Bank, which created a bad bank entity in 1988 to hold $1.4 billion of bad loans. Initially, the Federal Reserve was reluctant to issue a charter to the new bank, but Mellon’s CEO, Frank Cahouet, persisted and the regulators eventually agreed. 
  • Many companies see a business opportunity in buying NPAs. Buying NPAs from financial institutions with a discount, can be a lucrative business. Companies pay from 1% to 80% of the total loan and become the legal owner (creditor). The discount depends on the age of the loan, secured/ unsecured, age debtor, personal/ commercial debt, area of residence, etc.

Is India’s Cryptocurrency Ban Aimed At Announcing New Digital Currency Of RBI?

Is India’s Cryptocurrency Ban Aimed At Announcing New Digital Currency backed by RBI?

The twisted tale of the Cryptocurrency is back in the news. With the government planning to launch the proposal for banning these digital assets, let us look upon the events as they unfolded for the same and how it may be a precursor to the launch of Central Bank Digital Currency (a cryptocurrency) backed by the RBI.

Crux of the Matter


The Proposed Bill
The cryptocurrency and Regulation of Official Digital Currency Bill, 2021.

  • Establish a framework for creating Official Digital Currency issued by the RBI.
  • Seeks to ban all private cryptocurrencies.
  • Exempted for the usage of crypto technology.

The Dilly Dallying Timeline Of Crypto Ban

  • 2018: The RBI banned cryptocurrency transactions and mandated all the banks to stop dealing with cryptocurrencies.
  • 2019: The GOI panel too banned all the cryptocurrencies. A prison term of 10 years was established for individuals dealing in digital currencies.
  • 2020: The Supreme Court overturned the Central bank’s order terming it to be disproportionate.
  • 2021: The GOI proposed the bill in the lower house for banning the cryptocurrency. 

How Would RBI Develop Its On Crypto?

  • Step 1: A Central Bank Digital Currency (CBDC) would be backing RBI and in turn, the government.
  • Step 2: The Indian Rupee bills would be then converted into digital format.
  • Step 3: These digital bills would be issued and backed by the RBI.
  • Step 4: Further making it as an alternate currency for transactions.

Central’s Rationale For Ban

  • Price fluctuations.
  • The risk to consumers.
  • Criminal activities cannot be traced
  • An enormous amount of power consumption required for a single transaction.

Counter Arguments

There’s no such thing as a private cryptocurrency. Crypto by their very nature are decentralized and public.

Niscal Shetty, Founder Of WazirX

Crypto assets are more like alternate govt. Issued legal tender. Govt’s digital currency and cryptocurrency can coexist.

Rahul Pagidipati, CEO, Zebpay

Read more about cryptocurrency here.

Curiopedia
  • China has started its own digital currency called e-RMB. When made publicly available, it will be the world’s first state-backed digital currency.
  • RBI was conceptualised as per the guidelines, working style and outlook presented by Dr B. R. Ambedkar in his book titled “The Problem of Rupee – Its origin and its solutions” and presented to the Hilton Young Commission. Eventually, the Central Legislative Assembly passed these guidelines as the RBI Act 1934.
  • The central bank founded a subsidiary company—the Bharatiya Reserve Bank Note Mudran Private Limited—on 3 February 1995 to produce banknotes. The company operates in Indian and global markets, catering to security document needs of Central banks and monetary authorities of the world by designing, printing and supplying banknotes