Easier Sebi rules fail to lure start-ups to launch IPOs

Munbai: Four months after the capital markets regulator made it easier for start-ups to raise money and trade on Indian stock exchanges, no entrepreneur has moved to seek a local listing, preferring instead to raise funds from venture capital (VC) and private equity (PE) firms or individual angel investors.

Tough promoter holding norms set by the Securities and Exchange Board of India (Sebi), uncertainties about the valuations start-ups can attract and doubts over how liquid stocks would be after a listing are deterring start-ups from raising money through initial public offerings (IPOs), market participants say.

Since Sebi in June eased the norms for local listing of early-stage companies, BSE, Asia’s oldest stock exchange, and its larger rival National Stock Exchange (NSE) have already put in place the required sub-platform based on their Institutional Trading Platforms (ITPs) for listing of start-ups.

The move was aimed at creating an additional funding regime to encourage thriving entrepreneurial activity in the country. Investors such as VC firms in such start-ups were allowed to sell their holdings through initial share sales.

Yet, not one of the 4,200-odd start-ups in India has taken the bait, according to exchange executives and investment bankers. According to India’s software lobby group Nasscom, India’s start-up ecosystem is set to see funding worth $5 billion by this year-end, a 125% jump from $2.2 billion last year. Nasscom recently said that in 2015, 1,200 tech start-ups were born in the country, making India the third largest tech start-up ecosystem behind the US and the UK.

“People worry if this is really going to work, they don’t want to take risks,” said Ravi Gururaj, chairman of the product council at Nasscom. “A mediocre company won’t succeed because nobody will invest. The best companies have options—they can go to Singapore, they can go to New York, they can list here too. As a start-up, they would be remiss not to maximize their valuation. If you’re the CEO of a company, that’s your responsibility.”

“What I would have done if I were in Sebi is gone and made sure half-a-dozen great companies listed and show that this was possible,” he added.

On Tuesday, Sebi chairman U.K. Sinha, at a capital market conference in Mumbai, urged stock exchanges to actively engage in dialogue with start-ups and bankers to bring clients to their start-up trading platforms.

BSE, which has launched a start-up listing platform called BSE Hi-Tech, has formed a dedicated team to engage with entrepreneurs and investment bankers to bring companies from the start-up space to the platform, according to a top BSE official who spoke on condition of anonymity.

The BSE official said the main challenge coming in the way of start-ups listing are doubts harboured by individual entrepreneurs over the post-listing valuation of their firms.

“We are not sure how many start-ups will actually come and get listed. Many start-ups still feel they may get better valuation by listing abroad, where investors may be more mature to understand the potential of start-ups,” said the BSE official.

The founder of a large analytics start-up, who spoke on condition of anonymity, agreed that post-listing valuations were a concern.

“I have a huge pressure from my board to go public, but the pressure is to list on Nasdaq and not here, because the belief is that the returns would be higher there,” this person said.

In announcing the listing norms, Sinha mentioned that Sebi’s primary objectives were to prevent home-grown entrepreneurs from exploring offshore markets for raising capital and to make it easier for new business ideas to flourish within India.

BSE’s younger rival NSE, too, is unsure about the number of start-ups that are likely to get listed on its ITP in the next 6-12 months.

“We have been talking to entrepreneurs and some of the largest start-ups. All start-ups in the private equity funding stage are ideally positioned to get listed if they want, which means at least 1000 are capable of listing. But, we are not sure how many will actually get listed in the next one year,” said a top NSE official.

The NSE official, who also spoke on condition of anonymity, said the challenges vary from start-up to start-up, but the key ones include Sebi’s promoter holding norms for a start-up to get listed and uncertainties about the possible liquidity of the stock as the minimum trading lot size is Rs.10 lakh and the number of investors trading the stock may not be enough, the NSE official said.

“Key concern is liquidity. That is the number one concern and unfortunately there is no easy solution to it,” said Praveen Chakravarty, one of India’s earliest angel investors and co-founder of Mumbai Angels. “Valuation is not as much a concern as liquidity. Rules, too, are not as much a problem. If they solve the liquidity problem, I am sure many will come forward to list. “

The Sebi norms allow hi-tech start-ups in areas such as analytics and biotech to list in India on the ITP of exchanges if at least 25% of their pre-issue capital is held by qualified institutional buyers (QIBs) such as PE and VC firms and non-banking financial companies.

Other start-ups can also opt to get listed on the platform, provided at least 50% of their pre-issue capital is held by QIBs.

Further, a start-up offering needs at least 200 investors and the minimum trading lot size has to be Rs.10 lakh, according to Sebi.

NSE feels some tweaking in the norms may make listing more compelling for start-ups.

“We are discussing with Sebi if some changes on promoter holding norms could be made and how the uncertainties over post-listing liquidity could be addressed. Start-ups should understand that the main benefit of listing on the ITP is in terms of cost-effectiveness and possibilities of getting better financing from a wider range of investors,” the NSE official said.

On the special listing platform for start-ups, 75% of the shares will be reserved for institutional investors. The remaining 25% will be available to non-institutional investors. However, no person (individually or collectively with people acting in concert) will be allowed to hold more than 25% of the post-issue share capital in a listed start-up, according to Sebi.

Analysts say these are early days yet and entrepreneurs will gradually gain the confidence through persuasion to list their start-ups.

“It will take time, these platforms have just been introduced,” an official at ICICI Securities Ltd said. “Don’t think that many start-ups are themselves organized to raise money on a public platform. The entire process anyway takes 6-9 months, and since these platforms have been recently launched, we don’t expect any action for the first 3-6 months.”

The BSE official cited above said start-ups could follow the example set by small and medium enterprises (SMEs), whose listings gathered rapid momentum after a few showed the way.

“The main benefit of listing for start-ups is that it would provide an exit to the PEs/VCs and promoters in an easier way. Once some companies get listed the numbers will pick up faster,” this person said.

“In the SME space, it took six months for the first listing, another six months for the second and now it is 4-5 listing applications a week. Today, there are 117 SMEs listed on BSE’s SME trading platform. Start-ups will possibly follow the same trend,” he added.