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Made In India.. Stay In India!

Published on Sat, Jul 04,2015 | 10:43, Updated at Tue, Jul 07 at 17:02Source : CNBC-TV18 |   Watch Video :

Since 1999, only 3 India based companies have listed IPOs in the USA. Singapore has half a dozen India listings – mostly REITs. But, last year, the Singapore Exchange set up a Mumbai office to woo Indian companies. London boasts of more than 70 Indian companies – listed on the LSE and AIMS. The numbers may not speak of an exodus, but there is the fear that this new wave of Indian start-ups- Snapdeal, Ola, Zomato- when they are ready to go public, will go public in New York, London or Singapore. More so, because new regulations in 2014 allow Indian unlisted companies to list depository receipts abroad. This has prompted SEBI to devise a new start-up capital raising and listing platform.  Will Made In india ventures stay in India? Aayush Ailawadi finds out…

In 2010, MakeMyTrip, one of India’s leading online travel companies listed on the NASDAQ. It raised 70 million dollars in the IPO and on day one, the stock doubled in value. Founder Deep Kalra says that he picked Wall Street over Dalal Street because the Indian market wasn’t ready to accept internet businesses…

Lawyer and former SEBI legal chief Sandeep Parekh says that a foreign listing brings prestige and better valuations.

Sandeep Parekh
Founder, Finsec Law Advisors

“The Indian markets are reasonably deep, but valuations have been quite poorly valued. So that could still be one reason why people want to go abroad. For instance, Flipkart maybe valued at 20 billion dollars abroad and maybe 5 billion dollars in India. That’s pretty much the only reason I’d think companies would want to go abroad that they’d get a better valuation.”

NASDAQ has for long been the preferred exchange for technology and new age companies. Microsoft, Apple, Google, Amazon, Facebook- they’re all listed on the NASDAQ .But, the NYSE is catching up. Last year, Chinese e-commerce company, Alibaba listed on the NYSE after doing the largest IPO in history.

The question is, will Flipkart, Snapdeal, Ola, Paytm follow suit or can India keep them back?

It’s a question that Praveen Chakravarthy and his colleagues at SEBI’s Primary Market Advisory Committee have been trying to answer for the past few months. Praveen’s played entrepreneur, venture capitalist and investment banker - he points out that in the last 8 years nearly 3000 Indian start-ups have raised more than 60 billion dollars in venture capital.  

Praveen Chakravarty
Visiting Fellow, IDFC Institute
Angel Investor
Member, SEBI PMAC

“Let’s look at the numbers - there was 60,000 crores that went into new small and private companies venture capital firms in 2014. In the last 5 years combined, the IPO markets have generated 50,000 thousand crores. One Ola cabs, which a 2 years old company has raised more money through a foreign venture capital than the entire IPO markets put together in the last 3 years.”

But, Ola and gang would find it tough to go public on India’s main boards. That’s because SEBI’s current IPO rules including the need for a profit track record, restricted fundraising purpose, extensive disclosures and traditional valuation methods are not suited to start-ups, especially technology and internet based companies. So, based on the committee’s deliberations SEBI recently announced the creation of a new platform for start-ups to raise capital and list.

Praveen Chakravarty
Visiting Fellow, IDFC Institute
Angel Investor
Member, SEBI PMAC

“I am hoping that this would be very attractive for some of this start-up companies as well as for their venture capital and private equity investors to have their portfolio companies listed because the other side of the argument is that there are 1565 companies in India today, where those that have private equity in venture capital list for more than 5 years. Typically, I call it the 5 year edge. Venture capital and Private Equity investors that have invested in the company after 5 years start to think about how we exit to make returns. There has been a bottle neck when it comes to exists for these people and there’s a very important asset class. So, it was also from that perspective we will have to. See, this could be a good exit platform.”

There’s no doubt that India’s start-up community is enthused by this new platform. It has several good features but also an odd bias and an unchanged burden of paperwork. Let’s start with the good stuff.

A minimum 200 investors, each investing a minimum 10 lakh rupees… in the size of companies it will attract, this new start-up platform ranks somewhere between the existing SME exchanges and the main boards. And to appeal to its target audience, the platform plays it cool with rules. No need for a promoter – in fact no shareholder should own more than 25%. No cap on the money raised for general corporate purposes. The IPO pricing need not be based on traditional valuation methods. And the post issue lock in period is a mere 6 months. Investment banker Gesu Kaushal gives this regulation a big thumbs up!

Gesu Kaushal
Executive Director, Kotak Investment Banking

“I think the two points that this platform seeks to address is that most of these companies don’t really have promoters who hold sizeable shares in the company. Promoters have over a period of time been diluted significantly. Under our traditional ICDR regulations, it is required that a promoter holds and locks in 20% of his post issue capital for 3 years and a lot of these companies in the new age or start-up sector don’t have that kind of holding, so ITP addresses that problem. The second problem it addresses is tangible use of proceeds which is traditionally required for a brick and mortar company in India and we’ve kind of been reading about it that most of these start-ups don’t really have a tangible use of proceeds! A lot of it is advertising or discounts etc, that’s the other problem this regulation addresses.”

Sandeep Parekh
Founder, Finsec Law Advisors

“I think it’s a good development because it will allow these companies to raise funds for general corporate purposes, 100% of it, which means they can blow it up or burn the money on ads and paying salaries which is not permissible. Usually you need a project, you need to allocate that this is how you are going to spend the money etc, so I think it’s a huge liberalization from that perspective.”

Praveen Chakravarty
Visiting Fellow, IDFC Institute
Angel Investor
Member, SEBI PMAC

“This is perhaps is the first time in the countries history that we are moving away from the concept of the promoter. You’ve always thought of a company specially during listing time as the promoter. Who is the promoter? That’s a big question. Now we can say that a start-up or a new company has a founder but not a promoter in terms of equity ownership and we needed to enable that.”

Oddly, the new platform leans in favour of technology intensive companies. Earlier SEBI planned to exclude non-tech start-ups altogether. It has dropped that idea but not the bias.

So, if Snapdeal lists on this platform, at least 25% of its pre-issue capital must be held by qualified institutional buyers. But, for non tech companies, say PaperBoat, at least 50 per cent of the pre-issue capital must be held by QIBs.

Sandeep Parekh
Founder, Finsec Law Advisors

“I think this discrepancy is somewhat silly, but this comes from the fact that this platform- ITP was supposed to be only for tech startups. So, a lot of people gave comments including us saying that, why should we have preference for certain classes of companies so they seem to have relaxed that but they seem to have still stuck to their guns giving preferential treatment to particular types of startups which is essentially tech oriented startups. So, I don’t see any rational reason for keeping it except for the fact that historically it was even worse”

Tech or non-tech company, there’s no relief from paper-work. All start-ups will have to file a draft prospectus with SEBI for approval and while there’s the promise of fewer post-IPO disclosures, it’s not on paper.

Sandeep Parekh
Founder, Finsec Law Advisors

“Based on the press release, it’s very clear there has been no relaxation at all whatsoever. In terms of quality of disclosure, frequency of disclosure or in terms of relaxation in terms of clause 49- corporate governance norms. There’s a small relaxation with respect to material and non material, so certain non material disclosures go into the website instead of the prospectus. But, I don’t think the prospectus is going to look any different from a regular prospectus.”

Gesu Kaushal
Executive Director, Kotak Investment Banking

“See what are the long lead items in an IPO? This whole thing about promoter disclosures, group company disclosures, use of proceeds. Some of these will get addressed when the finer print comes I think. Other than that, investors need to know the business of the company, they need to see the financial performance of the company, they need to see how the capital structure is built up. Some of those I think are important disclosures which are required for investors in any case.”

Praveen Chakravarty
Visiting Fellow, IDFC Institute
Angel Investor
Member, SEBI PMAC

“Nobody really complains about post listing requirements as being a hurdle. For listing, you reduce the disclosure requirements as well as you reduce lock in and some of the other issues that were imposed. Now post listing once your listed if the markets are functioning effectively once you’re listed then the post listing requirement should hold good for all companies so which is they have to endure to the listing agreement and quarterly reporting and all of those, which I think is hygienic you know good cooperate behaviour and it has worked well across so there was no need to tamper with that.”

In the 3 years since they launched, the BSE and NSE SME exchanges together have just over 100 companies. These exchanges require compulsory market making for every listing for a minimum 3 years. The new start-up exchange does not yet feature this.

Praveen Chakravarty
Visiting Fellow, IDFC Institute
Angel Investor
Member, SEBI PMAC

“So the most important requirement is liquidity and how does liquidity happen, if you enable market making by merchant bankers. Merchant bankers today are not allowed to indulge in market making on the main board. Now, I think my suggestion definitely would be to allow market making in this segment and second, for start-ups and boards of companies that are choosing merchant bankers, choose a banker that will help make markets in the stock. It’s only then liquidity will get generated and it’s almost universally known that in the initial period there will be a lot of market making requirement. Only then this will succeed. So to me, that is a very key requirement, I was disappointed that it wasn’t addressed directly. Perhaps it will come in the regulations, but that will be very crucial.”

Sandeep Parekh
Founder, Finsec Law Advisors

“You have the large regular companies which have the usual, they want to raise capital for a project. You have SMEs which is meant for sophisticated investors, because the smaller the company, the more sophisticated the investor you need cause the risk is much higher and the third is of course this new platform which is meant for these companies. Ultimately, I think there will be fragmentation of markets which is not an ideal scenario. What I would want, my wishlist would be that these two get merged onto the main board and you keep the trading lot at 5 lakh or 10 lakh rupees, which would automatically protect the smallest retail people who could burn their fingers through the SME platform or ecommerce companies.”

India is experiencing a start-up frenzy like never before. That’s why SEBI has identified a list of 20 young companies, each valued at over a billion dollars and this platform is meant to keep such companies in India. This could be India’s answer to China’s new Strategic Emerging Industries Board or Singapore’s Catalist platform. But, an Indian Nasdaq still seems like a distant dream.
 
In Mumbai, Aayush Ailawadi

 
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