Shell companies. What’s the first thought that comes to your mind when you hear the term? ‘BLACK MONEY’, ‘TAX TERRORISM’ etc. But, what if I tell you that shell companies are the future? What if I tell you that shell companies could be the best investment destination for you and would provide massive returns? Well, I know it sounds weird, but have you ever heard about the term ‘Special Purpose Acquisition Companies (SPAC)?’ Well, if you haven’t, we’ll be discussing the aspects of a Shell Company and Special Purpose Acquisition Companies in this article. And I’m sure you’ll be thrilled to invest in em’ when they’ll enter the Indian markets.
Shell Companies. What’s a Shell Company?
A shell company is a company that doesn’t actually function as a company and exists only in paper. What are the functions of a normal company? A company has significant assets like land, factories, production units, offices, etc. But however, a shell company has none of them. They don’t produce or sell anything. Shell companies might have certain assets like investments, capital, and intellectual property. They also have bank accounts.
Shell companies can be formed by individuals or corporations for various purposes, mostly illegal like money laundering, tax evasion, etc. A shell corporation is set up anonymously without revealing the name of the owner. Hence, by setting up a shell corporation, an individual can engage in various business activities and do financial transactions without revealing his identity.
Where are Shell Companies formed?
Well, shell companies can be found in each and every country. But mostly, they’re formed in Tax Heavens. A tax haven is basically a country where tax rates on foreign companies and individuals are very less and sometimes negligible and so are the regulations. And as the word suggests, they’re literally ‘haven’ for shady companies, some of which are even involved in illegal businesses. Another thing that makes these countries ‘haven’ is that the companies don’t actually have to conduct business operations in these countries to enjoy tax benefits. And the most threatening thing to these shady businesses and their owners, Transparency, is often lacking in these tax havens, as the authorities of these countries don’t share the financial information of these businesses or individuals with the foreign tax authorities, until and unless they’re excessively pressurized to do so.
Some famous Tax Havens
- The British Virgin Islands
- The Cayman Islands
- Hong Kong
- The Bahamas
These tax havens cause great damage to various countries like the U.S, India, and other major economies as individuals and businesses operating in these countries illegitimately evade millions of dollars of taxes by hiding their money and setting up shell companies. These millions actually belong to the governments and which, if brought back, could be utilized efficiently for public welfare and infrastructure development.
Are Shell Companies used only for illegitimate purposes?
Not at all. A shell company might be set up to protect the company from the threatening regulations and laws of certain countries. How the tables have turned now! A shell company, which is considered corrupt, is sometimes set up to protect the parent company from corrupt regulations and laws of certain countries like excess taxation, saving their capital and assets which could otherwise be seized by the government.
A shell company, set up in a foreign country can be used to pool investments from businesses of various countries as they help them to get stable capital, as businesses from various countries can pool their capital together by setting up a company in a certain country (mostly tax havens) to have stable capital enjoying uniform and mostly preferential tax policies.
Special Purpose Acquisition Companies (SPAC)
Another legitimate purpose of a shell company is to raise capital for an actual company which can be done by going public (listing in a stock exchange, IPO). And that’s what a Special Purpose Acquisition company does. A SPAC is actually a blank-check company or a shell company that raises funds by an Initial Public Offering (IPO). These SPAC’s promise the investors to use the funds raised to take over an existing company within a certain timeframe, which will ultimately benefit the investors in the long term. A SPAC is generally set up by well-known, big-pocket corporations and investors. Large Wall Street firms like Goldman Sachs, Apollo, etc have ones themselves.
The merger or acquisition, when happens, helps the target company to go public without an actual IPO of that company. Hence, a SPAC helps the company to go public without facing scrutiny and diligence, as it would have faced for going public without a SPAC. Hence, this gives rise to suspicion and certain controversies. A recent example is Nikola, which has gone public through a SPAC and many investors have asserted that Nikola wouldn’t have made it through the scrutiny and diligence for an actual IPO, and wouldn’t have been able to go public, if not helped by SPAC.
A peculiar thing about SPAC is that it doesn’t actually reveal the target company to the investors that it’s going to take over or merge with. So, an investor doesn’t actually know what company he’s investing in. The shares of a SPAC eventually convert into the share of the target company after the merger. Hence, if you’re investing in a SPAC, you don’t know which company you’re actually investing in.
Still an attractive investment destination?
In spite of all the suspicion and controversies, investors consider SPAC an attractive investment destination, even if they don’t really know where they’re investing! The SPAC is not a recent phenomenon, but their rise in the global markets is, especially in 2020. Raising billions of dollars for the actual companies and substantial profits for the investors.
The total SPAC issuing over the past decade-
There was a steep rise since 2017, and the year 2020 saw a quantum jump in the issuance of SPACs. Well, these stats depict the new trend in the markets, and so can you. SPACs market capitalization is miles away today than they were a few years ago. And according to some big players in the market, their rise would be revolutionary in the coming years. According to Vivek Ranadive, a Silicon Valley Investor and the owner of Sacramento Kings, SPACs are capturing the greatest wealth creation opportunity in history.
The billionaire hedge-fund manager Bill Ackman and finance tycoons like Cliff Robins and Chinh Chu have already invested heavily in SPACs. And many firms are considering SPACs as a better vehicle to go public and avoid the hurdles and diligence of a normal IPO. Major companies like QuantumScape, Nikola, and Fisker, Astra, Rocket Labs, and Spire, the tech companies, which are the most attractive companies for the investors, as the tech companies are the future, accessed the market capital through SPACs.
SPACs in India
The SPACs haven’t entered the Indian markets yet. But due to this new trend, market regulator SEBI has asked its Primary Market Advisory Committee (PMAC) to submit a report regarding the SPACs and the formation of regulation for its efficient functioning in India. And I’m sure that you’re gonna see the SPACs entering the Indian capital markets very shortly.