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Start Ups, Stay Back!

Published on Sat, Apr 18,2015 | 15:31, Updated at Mon, Apr 20 at 18:38Source : CNBC-TV18 |   Watch Video :

Well, it seems ‘achche din’ are here for Indian start-ups and their investors! SEBI has proposed a new IPO route for start-ups. An alternate capital raising platform with certain regulatory relaxations to keep young companies from listing abroad! Will it work? Prakash Nene of Multiples Alternate Asset Management & Manan Lahoty of Luthra & Luthra join CNBC TV18’s Menaka Doshi to answer that question.

Doshi: Are there really that many young Indian companies that want to list abroad? I mean in the last five, eight, ten years I can think of half a dozen companies that have maybe given up the idea of listing here in India and preferred to list abroad.

Nene: This question is valid. Today, you are absolutely right; there are not too many people who maybe ready to list on such kind of a platform. But you must understand, as far as this whole sector is concerned, this is just a five to ten years old sector. The number of companies who when you start up, you take at least three, four, five years to really grow to certain level. So, the opportunity to list was not available to them in the past. Barring one or two big ones, most of the start-ups are very new. They are there for last 3-5 years. So, this is a time now the momentum is gathering and I do believe that as far as the listing is concerned we will see more listing in the next few years.

Doshi: Is India a less attractive market than the US, than Singapore? Do you have many clients coming to you and saying, “I would rather incorporate outside India, so I can list outside India”?

Lahoty: Regulatory framework-wise yes, in a way because the US has also come out with something called Jumpstart Our Business Startups (JOBS) Act a few years ago. They have been coming out with various regulations in the JOBS Act including the Regulation A Plus, which came out very recently. So, in that sense Securities and Exchange Board of India (SEBI) needs to be competitive. Also, given and keep in mind that just last year, few months ago, Indian companies were allowed for the first time after many years, to list overseas without listing in India.

Doshi: The Depository Receipts Scheme…

Lahoty: The Depository Receipts Scheme (DRS), yes.

Doshi: So, you are saying that this is a response to that. If that sort of encourages let us say the export of Indian capital market, SEBI is doing counter efforts to make sure India looks as attractive, right?

Lahoty: That is right. Regulatory framework-wise, yes.

Nene: I would like to add this is not just the regulatory issue we had to look with. We have to look overall what an entrepreneur will be looking forward to. He would be looking forward to an eco-system which is recognising him. Now, Silicon Valley and NASDAQ is the eco-system where the new age entrepreneurs really connect to very well because that is the place most of them come from. Secondly, some of these situations in NASDAQ especially, you have a lot more liquidity. You have a lot more analyst coverage. There are opportunities for other listed entities in those exchanges to buy such exchange, that means there are lot of mergers and acquisitions (M&A) opportunity. If you take all those things into account, then you are also externalising yourself, you are not just depending on an Indian. So, if your company is outside India, for example, it is incorporated outside India, listed on NASDAQ. These guys are very protective about their intellectual property (IP). So, there are varieties of other angles, I would say, beyond the regulatory framework which will come into the play.

START UPs, STAY BACK!

Main Board: IPO + Listing
SME Exchange: IPO + Listing
Institutional Trading Platform: Listing Only

START UPs, STAY BACK!
                                                                  SME EXCHANGE                               ITP

Maximum Paid Up Share Capital              Rs 25 cr                                           Rs 25cr
Promoter Lock in                                                              20% + 3 years
Minimum Trade                                        Rs 1 lakh                                       Rs 10 lakhs

START UPs, STAY BACK!

Institutional Trading Platform
-    Less than 10 years since incorporation
-    Revenue < Rs 100 cr p.a.
-    To de-list if Revenue exceeds Rs 300 cr or Market-cap exceeds Rs 500 cr

START UPs, STAY BACK!

Modified Institutional Platform
Objects of the Issue: Only broad objects to be disclosed
Minimum Promoter Holding: Not applicable. Only ‘professionally managed’ companies permitted
Lock-In: 6 months for pre-issue capital
Issue Price: Don’t need EPS, P/E, RONW… disclosures

Doshi: India has national stock exchanges such as the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE) and exchanges for small and medium enterprises such as the BSE Small and Medium-sized Enterprises (SME) exchange and NSE’s Emerge that offer initial public offerings (IPO) and listing opportunities. The SME exchanges also host institutional trading platforms on which SMEs can list their securities but without an IPO. The size threshold is common to both. A maximum paid up capital of Rs 25 crore. And in both cases, minimum promoter holdings apply with a post listing lock-in period. To list on the institutional trading platform (ITP) a company must meet several other criteria, such as less than 10 years since incorporation and less than Rs 100 crore in revenue an if the company exceeds a revenue of Rs 300 crore or a market capitalisation of Rs 500 crore it cannot continue being listed on the ITP. Now, in its discussion paper, SEBI has proposed modifying the institutional platform to allow capital-raising with certain regulatory relaxations. Who will this platform cater to when you have an SME platform and an ITP platform?

Lahoty: See, couple of things. First of all the discussion paper says it is a modification of ITP platform, the one that you spoke about, institutional. So, basically, yes, it is a modification of the current one. We will have to see how the regulations are framed. But also you have to keep in mind that ITP platform keeps, has certain legal limitations. So, for example if your turnover exceeds Rs 300 crore you must de-list from ITP or if your market goes capital beyond Rs 500 crore. So, are we talking about a company which is here only for some time period, then will eventually migrate or we are actually providing a new platform for companies which are larger than Rs 500 crore to begin with or larger than Rs 300 crore revenue to begin with can list for a long period of time here. For which, you will of course you will need a separate platform.

Doshi: But, if everything below Rs 25 crore can list on the SME platform and everything above Rs 25 crore can list on main boards, I am still not able to understand why we need a whole new platform. Why can we not adapt the SME model?

Nene: You are right. If you really ask me, you do not need a separate platform but you need to carve out a different kind of requirements of different sectors. So, for example if when you say an SME platform, primarily the connotation is only the SME kind of companies can list.

Doshi: But young companies, start ups are also small medium enterprises, are they not?

Nene: I agree with you. But that is a question of nomenclature. Let us not go into that but if you ask me frankly, yes it is possible to have one platform where all these requirements are taken care of. You can really have some carve outs for different parts.

Lahoty: That said, I agree with you. I think instead of coming out with a whole new set of regulations on something like this, maybe SEBI could have modified SME or the ITP or the main board itself.

Doshi: Because it is relied on ITP as you pointed out.

Lahoty: It does but, there are a couple of concerns that SEBI might have. One is that these are loss making companies historically. More importantly there is no promoter being identified here. There is no promoter lock-up of shares. Also there is a lot more flexibility on how IPO money can be used. So, all these three things are fairly important for SEBI to protect the retail investors. Now, SME market allows retail participation. But the threshold for retail participation is at least a minimum of Rs 1 lakh. Here the threshold is Rs 10 lakh. So, SEBI is slicing and dicing the markets a little further to see that for these high risk companies potentially because they are not sectors, they have innovative business models as SEBI speaks about, the risk could be higher. So, they need to protect the retail investors a bit more here than compared to the main board or SME.

START UPs, STAY BACK!

Modified Institutional Platform
Proposal: Applicable to companies in area of software product development, e-commerce, new age companies with innovative business models…

START UPs, STAY BACK!

Modified Institutional Platform
Proposal: Applicable to companies where no person holds 25% or more of pre-issue capital
                    Maybe considered as professionally managed companies

START UPs, STAY BACK!

Modified Institutional Platform
Proposal: 2 categories of investors
                  QIB allotment: 75%
                  NNI allotment: 25%

No QIB shall be allotted more than 5% of issue size

START UPs, STAY BACK!

Modified Institutional Platform
Proposal: Minimum application size: Rs 10 lakhs
                  Minimum number of allottees: 500
                  Minimum Trading Lot: Rs 5 lakhs

START UPs, STAY BACK!

SEBI proposes Alternate Capital Raising Platform
-    Modify ITP to allow capital raising
-    Reduce regulations/permit carve-outs

Doshi: To encourage young companies to list in India, SEBI has proposed modifying the institutional trading platform. It has also proposed relaxing some key regulatory requirements such as producing disclosures regarding the objects of the issue, doing away with minimum promoter holding requirements, applying a lock-in of just six months on pre-issue capital and relaxing the criteria to be used to determine issue price.

Nene: These relaxations are really very good. This is what the promoters would be looking forward to because most of these young companies, they would be making losses in the beginning. So, when they are making losses what kind of valuation matrix you follow, literally you are used to your discounted cash flow (DCF) or some other method is very difficult for somebody who really, say if you have to give the entire basis of pricing it is going to be very tough for young companies to do that. Secondly about this no promoter bet because we do invest sometimes in what is called new-age companies as well and we know that these companies are started by four or five youngsters coming out of Indian Institutes of Technology (IIT), Indian Institutes of Management (IIM) and then coming together and asking for investors like us to come in and participate. So, investors can have anywhere between 80-90 percent shareholdings in these company and these promoters have 10 percent and then you put obligations on them that for three years you can earn, 20 percent of the entire capital is locked in is just impossible because they do not have that many shares to begin with. So, how would you lock in the entire capital? So that is not possible.

Doshi: So, promoter, lock-in and the objects of the issue and the pricing, all of them?

Nene: See, what is the object of the issue in such cases mostly? I mean, object of the issue would be to get money to burn, get money to fund losses. These companies in next 3-5 years will…

Doshi: Get money to advertise often, right?

Nene: They keep incurring losses for next 3-5 years and how do I write in the object of, I mean if I had to write in a prospectus.

Doshi: Money to burn would be fun to read in a prospectus.

Nene: So, I think SEBI is now being a little more practical on these aspects.

Doshi: Does it go far enough, Manan? Because I am sure even though they are relaxing for instance the lock-in of shares, the fact that pre-issue capital has to be locked in for six months thereafter also creates certain restrictions within itself right? So have they gone far enough?

Lahoty: If one were to read the way the discussion paper is, it means that you cannot do an offer for sale which is the existing shareholders cannot sell in this IPO…

Doshi: So, it has to be fresh capital-raising?

Lahoty: If that is the intention. We still have to wait to see how the regulations will be worded.

Doshi: Yes, sure, this is just a discussion paper.

Lahoty: Right, but that should not be the intent is what I was thinking. I mean you cannot stop venture capitalists (VC) from selling in an IPO. I think the entire purpose of doing an IPO at times is also that VCs can exist or private equities can exist. In addition to that, it does confuse me a little bit because SEBI says main board listing should only be done through an IPO offer document which SEBI needs to check, approve and SEBI’s also detailed disclosure standards for it. SME listings, ITP listings do not require a SEBI approval on the offer document. Here they are saying it is kind of in between.

Doshi: In the discussion paper they have suggested that the prospectus would have to come to SEBI.

Lahoty: That is right. Now, if the idea is the retail will not participate here, and the threshold of retail here is far higher so, it is not Rs 1 lakh investor, but Rs 10 lakh investor.

Doshi: You are going as per the ITP parameters?

Lahoty: That is right. So, if in ITP or SME you do not require SEBI approval, largely also because SEBI thinks that a very small retail investor is not participating. Here even a Rs 1 lakh retail investor cannot participate. Then why does SEBI need to provide detailed disclosure standards and plus review them? I think you need to give more flexibility if this is not a main board listing.

Doshi: So, in doing away with some old restrictions, SEBI has done a good thing or proposed a good thing. But, they have also suggested a bunch of new restrictions. So for instance, this platform is supposedly going to be available only for technology and technology based or related companies, so to speak. So one could very well ask the question if you were a start-up in a consumer space, why can you not avail of something like this?

Nene: Absolutely, how do you define technology? Even in a consumer company if you have a solid backend IT system and you are making losses…

Doshi: So is Flipkart a technology company or is Flipkart a consumer company? I wonder how would you define it at the end of the day, right?

Nene: So, this definition has to be. First of all why do you need to have a definition?

Doshi: That is one restriction. Secondly I understand that they needed to do away with certain promoter requirements because often like you said, these companies do not have a promoter, but to insist that there be no promoter, so what happens in the odd case where a founder has managed to hold on to 20, 25, 30 percent of his company? Would he not have access to a platform of this nature simply because he has been able to hold on to that much? That is another restriction I wanted to bring up. The five percent limit on allocation to qualified institutional buyer (QIB), the single QIB. Minimum 500 allottees in an IPO on such a platform. A minimum trading lot of Rs 5 lakh and all pre-issue capital locked-in for six months which Manan has already dealt with. They have done away with some old restrictions but imposed some or suggested that they should impose some not very reasonable new restrictions.

Nene: On the promoter thing, I have a little different view, I think as far as the promoter thing is concerned, if they are bringing it that below 25 percent, I think that maybe, from my point of view, that is okay because what will happen otherwise is a lot of families, industrial families, they start new-age businesses and just by creating, going through this platform and even holding 30, 40, 50 percent as a subsidiary of a large corporate, that would also then get away from there. I mean today what is this whole idea? The idea is that new-age businesses, new entrepreneur, first time entrepreneur, this is something for them. This is not something for large corporate houses or their subsidiaries to come here.

Lahoty: One of the important points that at least I saw in this is that they assume that you are a promoter if you have more than 25 percent shares. So, if a company is floated by or sponsored by a private equity investor, private equity investors are professionally run. And the chances are they would probably even have professional management for a portfolio company. Why are we presuming that those companies are not professionally managed? And hence not covered here?

Doshi: So, you are saying that if the private equity investor has more than 25 percent, that kind of company would not be able to avail of this platform at least based on what they have put out in the discussion paper so far. So, do away with this restriction that this should apply only to tech companies, do away with this artificial definition of what is professionally managed, do away with the rest of the restrictions as well? The five percent limit on QIBs, the minimum 500 allotttees, the trading lot of Rs 5 lakhs, the pre issue capital lock-in of six months?

Lahoty: The way I see it, these are important investor protections. On the back of this, you are able to liberalise many other things. So long as SEBI is comfortable that retail investors will not be participating in the market, then I think they can do away with the first three, four, things.

Doshi: So, you are too fussed about these things?

Lahoty: Not so much, that is important protection for the investors.

Doshi: One important issue, all of this has to do with pre-issue enduring the IPO. But, equally importantly, Manan, post issue compliance requirements, what would these companies, what do the papers suggest would be the compliance threshold for these companies? Do they have to comply with the listing agreement? Does that mean Clause 49 applies to them? How are they ever going to meet that?

Lahoty: That is actually a very important aspect also because if you see JOBS Act in the US made sure that your post listing compliance at least for a few years is more reasonable and workable. SME ITP companies do not need to comply with Clause 49, the new Clause 49. The hope is that would also apply to those companies here. It is not very clear so far because it is a modified ITP platform, so the presumption is the Clause 49, the new one should not apply to these companies. Rest of the stuff is pretty alright. De-listing and stuff we still have to see which of those regulations would eventually apply to these companies or take-over code regulations. But, the burdensome aspects of Clause 49 would not apply to these companies should be a good starting point.

Doshi: Anything else within issue of capital and disclosure requirements (ICDR) compliance requirements that would need to get relaxed at all to meet the requirements of companies like this?

Lahoty: I think raising of further capital especially if it is not through private placements. So, currently SMEs can list on SME exchange and raise capital only through, sorry ITP companies can only raise through private placements or rights issue. That restriction should not apply to these companies.

Doshi: We are the end of our time in that sense, so I am just going to put one final question to both of you and in that if there is anything else you want to add about what this paper ought to be focusing on. Manan brought up the issue of the depository receipt scheme which liberalises how both listed companies in India and unlisted companies in India can access the overseas markets, level one American depository receipt (ADR) listings in the US, for instance. This is an effort to bring that company back here to India and say look we can create an equally attractive platform here in India. On the face of it, does it succeed or would you say there is a lot more work to be done?

Nene: this definitely is a right step I would say, but the overall business environment also has to improve. What happens for example in US, NASDAQ when you list, you do not have to worry about minimum alternate tax (MAT), it is a stable regime.

Doshi: You cannot bring MAT into this discussion.

Nene: No, but an entrepreneur thinks all that. See, if he would rather like to externalise himself, have a company incorporated in a jurisdiction outside India, list it on NASDAQ and get away from all these issues, somebody is buying and selling shares in India. Now, of course they have clarified that for FII it is exempt, but what about the others who are not FIIs? For them, MAT is applicable in India or not applicable in India, God knows.

Doshi: So, SEBI cannot fix that.

Nene: No they cannot. But then some of these things evolve.

Doshi: To the extent of what SEBI can fix?

Nene: I think they have done a good job.

Doshi: They have done a good job, a good starting point you would say? Manan, you agree?

Lahoty: Good starting point. It is just that you of course have the global benchmark and I think you can do better at times than what they are doing. Just because JOBS Act also requires an offer document should be filed with Securities and Exchange Commission (SEC) before you can do an IPO. That should not be the reason why we should have the same regulation in India. So we can improve on the system, we can definitely have a regulation which is far better than the discussion paper but I agree it is a good start.

 
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