IPOs for Start-ups

How about stopping the export of risk capital?

On February 27, an innocuous meeting of SEBI with technology start-ups could actually grow into something really significant. According to preliminary estimates, Indian start-ups like Flipkart, Snapdeal etc have been raising venture funds but avoiding the IPO route. Similarly, veteran players like rediff.com and makemytrip.com are listed abroad, but not in India. That is exactly the problem that SEBI is now planning to overcome when it meets on March 27.

Lessons from the US market…

Over the years, the US has seen global tech and internet giants raising money through the IPO route. In the process, it also creates wealth for the millions of retail investors. Look at companies like Amazon, Google, Facebook and more recently Jackie Ma’s Alibaba. All these companies have raised billions of dollars in the IPO market despite having non-traditional business models. Currently, there are about 30 tech and internet companies from India who have relocated abroad. They are currently worth $6.2 billion and could multiply manifold over the years. Why to miss out on this opportunity?

How about easier listing norms …

That has been the primary focus of many start-ups, who believe that easier IPO and listing norms will pave the way for the development of a vibrant IPO market in start-up equities. But, one needs to understand that there are some unique challenges here. Firstly, the existing norms insist on profitability track record. But most of these new-age internet companies continue to make losses for a very long time. For example, Amazon still makes losses after close to 2 decades of existence. Secondly, the existing prospectus requires IPO companies to disclose how the IPO funds will be allocated towards tangible assets. That is tricky as most internet companies invest heavily on intangible assets that do not adhere to the strict definition of asset creation. Last but not the last, there are no valuation benchmarks, although one can say that it is a chicken-and-egg situation.

Striking that fine balance…

SEBI has a tough task ahead. It is primarily committed to protecting investor interests. With net companies having little by way of pedigree or track record, this becomes a challenge. At the same time, SEBI will also be keen to ensure that this lucrative market does not get exported. In the absence of an enabling environment in India, that is most likely to happen. To begin with, SEBI can at least start permitting select internet companies to do an IPO with minimal disclosures. If it backfires it could be embarrassing, but that is a risk that SEBI will have to take. For letting the opportunity go abroad would be an affront to the idea of “Make in India”. That should surely clinch the issue! ©

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