SPAC: Solutions to Indian Housing Finance Sector
CA. Satheesh K V
Member of the Institute of Chartered Accountants of India. Contact: kvsatheesh@gmail.com
Dr. MS Raju
Director (Rtd), School of Management and Entrepreneurship, KUFOS, Ernakulam. Contact: eboard@icai.in
1. The Indian Housing Crisis: 4.58 Lakh Stalled Homes
Big-ticket industrial loans, luxury housing projects, and commercial loans started displaying symptoms of failure in the early phase of the COVID-19 pandemic and are currently in an acutely weakened state due to a severe liquidity crunch. Crucially, most of these accounts were classified as standard performing assets until lockdowns commenced.
While seasoned listed corporations can access capital markets with relative ease, raising primary capital remains a herculean task for unlisted real estate developers. Most residential construction companies in India operate as unlisted entities, confined to localized demographic micro-markets without an all-India corporate presence.
The Stalled Project Reality: Metro vs. All-India Figures
- Seven Major Metros (Delhi-NCR, MMR, Chennai, Kolkata, Bengaluru, Hyderabad, Pune): Nearly 2.20 lakh housing units worth Rs 1.56 lakh crore, where construction commenced on or before 2011, remain stalled and incomplete.
- All-India Total: Around 4.58 lakh housing units stand incomplete and stalled across the nation as of March 2020.
- Government SWAMIH Fund Package: The Union Finance Minister announced a support package of Rs 25,000 crore to revive stalled projects. Under this mechanism, the Central Government committed Rs 10,000 crore, with the remaining capital syndicated via state-owned Life Insurance Corporation of India (LIC) and State Bank of India (SBI) through a SEBI-registered Category II Alternative Investment Fund (AIF).
However, given the gargantuan scale of capital required to rescue lakhs of stranded middle-class home buyers, public budget allocations alone cannot suffice. The government must explore innovative capital market alternatives such as Special Purpose Acquisition Companies (SPACs).
2. Special Purpose Acquisition Company (SPAC): Anatomy & Operational Life Cycle
A SPAC is a publicly traded, developmental-stage company that possesses no commercial operations or established business plan of its own. It is formed strictly to raise capital through an Initial Public Offering (IPO) with the explicit objective of merging with or acquiring an existing operating business entity.
SPACs perform as cash-rich enterprises scouting for prime investment opportunities with substantial funds in their kitty—hence popularly termed “Blank Cheque Companies”. Globally, SPACs achieved explosive growth in European capital markets and the United States. In 2020 alone, more than 50 SPACs registered in the USA, raising approximately $21.50 billion from public markets, typically structured to complete an acquisition within 18 to 24 months.
The Seven Phases of a SPAC Deal Lifecycle
- Sponsor Backing & Formation: Formed and led by seasoned private equity investors, venture capitalists, and industry veterans with proven domain track records.
- Blind Pool Formation: At incorporation, the SPAC identifies no specific acquisition target to the public; internal investment avenues remain undisclosed during the IPO.
- Underwritten IPO: Shares and warrants are underwritten by investment banks or privately placed with institutional anchors before broader public subscription.
- Two-Year Trust Escrow: IPO proceeds are quarantined in interest-bearing government securities or trust escrow accounts for a maximum period of 2 years. Interest earned, net of administrative expenses, accrues toward the acquisition.
- Mandatory Liquidation Safety Net: If the management fails to consummate a qualifying business combination within the 2-year window, the SPAC is dissolved and 100% of escrowed funds are returned pro-rata to public investors.
- De-SPAC Business Combination: Upon shareholder approval, the target company merges into the SPAC, enabling the operating business to continue as a publicly traded company.
- Fast-Track Listing Benefits: Unlisted operating targets achieve listed status rapidly, bypassing traditional IPO roadshows, book-building delays, underwriting discounts, and market volatility.
Chart 1: Operational Capital Flow in a SPAC Architecture
Public Investors & Sponsors ➔ Subscribe to Shares / Warrants ➔ SPAC Issuer Entity ➔ Execution of Trust Agreement & Appointment of Trustee/Board ➔ IPO Proceeds held in Escrow ➔ Disbursed as Acquisition Consideration to Target Operating Company upon De-SPAC closing.
3. Indian Regulatory Bottlenecks: Detrimental Laws Inhibiting Domestic SPACs
Currently, SPACs cannot be incorporated or listed domestically in India due to conflicting statutory frameworks that penalize non-operating shell structures:
4. Indian Precedents: Cross-Border Listings via US SPACs
In the absence of a domestic framework, prominent Indian enterprises successfully utilized the US SPAC corridor to access global capital on NASDAQ:
1. ReNew Power ➔ RMG Acquisition Corp II
India’s premier renewable energy champion combined with US-based SPAC RMG Acquisition Corporation II (RMG II), achieving a landmark public listing on NASDAQ.
2. Videocon D2H ➔ Silver Eagle Acquisition
Listed on NASDAQ via reverse merger with Silver Eagle Acquisition Corporation, co-founded by Harry Sloan (former MGM chief) and Jeff Sagansky, issuing American Depositary Shares (ADSs).
3. Yatra Online ➔ Terrapin 3 Acquisition Corp
Leading Indian travel portal Yatra.com achieved a NASDAQ listing via reverse merger with Terrapin 3 Acquisition Corp (TRTL) underwritten by Deutsche Bank through its US holding firm.
5. Deploying SPACs in the Housing Sector: Restructuring Stressed Real Estate
SEBI’s Primary Market Advisory Committee (PMAC) has constituted a Committee of Experts (COE) to evaluate the regulatory feasibility of introducing SPAC frameworks in India. While startups are natural beneficiaries, the stalled housing sector represents the most urgent candidate for SPAC intervention.
Housing Finance Institutions (HFIs) and banks hold substantial exposure in incomplete real estate projects, where loans have degenerated into Non-Performing Assets (NPAs) with inadequate security to enforce mortgages. A formalized, sector-focused Housing SPAC can operate on a pan-India basis, achieving economies of scale in material procurement, engineering management, construction costs, and professional oversight.
Table 1: Location-Specific Breakdown of Delayed Units & Incomplete Housing Projects in India
Source: Consolidated from industry research reports (Economic Times, JLL, MagicBricks, Times of India, Business Standard).
National Urban Housing Shortage: The RICS – Knight Frank Report
As evaluated in the research report “Brick by Brick” prepared by the Royal Institution of Chartered Surveyors (RICS) in association with international property consultant Knight Frank: India is projected to require an additional 25 million affordable houses by the year 2030. As of July 2019, the urban housing deficit stood at approximately 10 million units, predominantly concentrated within the Economically Weaker Section (EWS) and Lower Income Group (LIG) segments. Completing partially constructed homes is an urgent national priority.
The top three clusters—Delhi-NCR (83,470 units), MMR (43,449 units), and other parts of Maharashtra (12,644 units)—aggregate to approximately 1.40 lakh stalled units. If a specialized Housing SPAC focuses solely on Delhi-NCR and MMR, it could resolve and deliver 1.27 lakh homes through operational synergies, clustered material procurement, and localized project execution.
6. Conclusion & Policy Recommendations: A Pilot Sandbox for Stalled Housing
The globally proven SPAC structure should be actively evaluated for implementation in India, at least for capital-starved priority sectors requiring urgent intervention—namely housing construction, infrastructure development, rural healthcare, and tech start-ups.
Regulators can test the waters by formulating sector-specific regulatory sandboxes. Based on early performance and monitoring, compliance parameters can be calibrated before expanding across broader industries.
Quantifiable Social & Financial Impact of a 20% SPAC Resolution
Even if domestic SPACs achieve a modest 20% resolution rate across the Delhi-NCR, MMR, and Maharashtra clusters, approximately 25,000 completed homes would be delivered to families. This would release thousands of crores in frozen HFI loans, turn stressed non-performing assets back into cash-generating units, and provide a permanent institutional panacea for incomplete properties in India.
References
- Harvard Law School Forum on Corporate Governance, Special Purpose Acquisition Companies: An Introduction.
- Annual Report 2019-2020, Ministry of Housing and Urban Affairs (MoHUA), Government of India; Centre for Policy Research, New Delhi.
- National Housing Bank (NHB), Annual Report – Report on Trend and Progress of Housing in India 2019-2020.
- National Stock Exchange of India (NSE), Annual Report 2020.