Considering a litany of hurdles faced by startups in getting listed in India, markets regulator Securities and Exchange Board of India (SEBI) is expected to form the regulatory framework for setting up an alternative capital raising platform for new generation firms. The final shape of the framework with relaxed norms for tech startups will be known after SEBI’s board meeting on June 23. According to sources, after the board sanctions approval and releases guidelines which will be followed by a government notification, the new bourse is expected to come into effect by August.
It all started in the third week of December last year when Securities and Exchange Board of India (SEBI) chairman UK Sinha took his team of board members to Bangalore for a rare meeting. The team sat with eight startup founders and a few investors to understand the problems faced by startups in getting listed in India.
Manish Dugar, chief financial officer of InMobi, Byas Nambisan, senior vice president of Ezetap Mobile, Shivakumar Ganesan, cofounder of Exotel, Aditya Sanghi, co-founder of Hotelogix, Bikash Barai co-founder iViz Security, Pratyush Prasanna, then vice president of Paytm, Rajesh Ghonasgi, chief financial officer of QuickHeal and Sumanth Raghavendra, co-founder of Deck.in represented startups in the meeting initiated by technology product industry think tank iSPIRT (Indian Software Product Industry Round Table) which was represented by Mohandas Pai during the discussion.
The founders, top executives and investors pointed out how successful startups often end up moving their headquarters to other countries. Absence of provisions for convertible equity for early stage companies in India and taxation hurdles prompt startups to register in Singapore or the US. According to iSPIRT, 54 per cent of Indian startups which raised Series A funding moved their domicile to Singapore in 2014 and it is expected to be about 75 per cent this year.
In future, this could become an even bigger loss for the Indian economy. For instance, when e-commerce major Flipkart lists – it plans to launch an IPO in the not-so-distant future – it will unlock value for investors in Singapore or New York and not Indian investors. Flipkart is domiciled in Singapore and Indian law does not permit a foreign firm to list on domestic bourses.
“We told the SEBI leadership that tweaking existing laws will only result in sub-optimal results,” Sharad Sharma, co-founder iSPIRT, told VCCircle.
SEBI has responded swiftly. Within three months, it released a discussion paper to ease norms for listing technology startups in India. It then reached out to other stakeholders such as stock exchanges and investment bankers besides continuing engagements with iSPIRT’s seven-member ‘List in India’ team led by Sudhir Sethi of IDG Ventures.
SEBI had to address many issues. The current listing norms stipulate companies should report three years of profitability before launching an IPO. For early stage tech firms, this is unlikely as they invest all their resources to buy future growth.
In order to protect retail investors and lenders, IPO rules mandate a minimum stake-holding of 20 per cent by promoters and three-year lock-in of their equity holding.
“While conventional companies are promoter-driven, startups are founder-driven. They may sometimes exit and start another venture. So the three-year lock-in period does not suit them,” said Sanjay Khan, associate at law firm Khaitan & Co, who is also a member of iSPIRT’s ‘List in India’ team.
The proposed framework seeks to remove clauses such as three-year profitability and bring down stake-holding cut-off and three-year lock-in for promoters.
Keeping in mind IPOs of early stage companies will still be risky for retail investors to participate, there is a proposal to keep the minimum application size at Rs 10 lakh. Since only those who buy stocks worth Rs 10 lakh or more (who are presumably informed investors) can participate, regulators need not worry about protecting retail investors. Eventually, this may be lowered to Rs 5 lakh, according to sources.
Post IPO, the lock-in period for promoters is expected to be brought down to six months for companies listing on the proposed platform.
The proposed framework also seeks to ensure lesser interference from regulators in price discovery of tech startups floating IPOs.
“We are going to have an all new bourse, something as good as Nasdaq, for startups,” Sharma said.
The SEBI board is supposed to give final approval for the new bourse at its meeting on June 23. A mail sent to SEBI spokesperson seeking further details did not elicit a response.
According to sources, both BSE and NSE are keen on starting the new bourse and the latter has moved ahead with initial discussions with various stakeholders in the Indian startup ecosystem. Spokespersons of both the exchanges did not reply to emails sent to them. Both the bourses already have separate platforms for listing SMEs in the country.
One question that arises is whether Indian tech startups need to rely on public listing to raise capital amid such strong inflow of capital through PE/VC investors. “Startup listing is more about facilitating easy exit for investors than capital raising,” said Sharma. As VCs and PEs typically invest for five-seven years, a source for exit and liquidity is important for the emerging startup ecosystem.
At least a couple of listings are expected on the proposed platform in the first year.