Listing in India: Valuations might blunt Sebi push

Some markets abroad, as in the US, are considered far more accepting of a start-up's prospects before it turns profitable; tax treatment is another issue

Earlier this month, shares of direct-to-home service provider Videocon d2h got listed on the Nasdaq stock exchange in the US, albeit through a Silver Eagle Acquisitions, which took 33 per cent stake.

Videocon d2h had plans to list domestically and even filed its offer document twice with the Securities and Exchange Board of India (Sebi). However, the deal with Silver Eagle, sources said, fetched at least 50 per cent more in valuation than what it would have got by listing in the home market.

Experts believe availability of attractive valuations in foreign markets could blunt the initiatives by Sebi and the government for a more relaxed regulatory framework, to encourage start-ups and other companies to list domestically.

The advantages available in developed markets like the US could mean domestic start-up superstars like Flipkart or Snapdeal ditch listing in the home market, they add.

Legal firm Khaitan & Co’s executive director, Sudhir Bassi, says apart from the regulatory framework, there are various other considerations for choosing a market to list. “Beside ease of listing, availability of a set of target investors and valuations could be important considerations,” he said.

Last week, U K Sinha, chairman of Sebi, said a new policy for Initial Public Offers by start-up companies would be ready in three months.

“We want our companies to list in India rather than being forced to list abroad…a certain set of rules will have to be carved out for them (start-ups and e-commerce companies) because they have a very specific business model,” he had said.

As most domestic start-ups are not yet profitable, doubts remain whether domestic institutions would embrace these if they decided to list here. S Naren, chief of investment at ICICI Prudential AMC, termed companies in the e-commerce space as “concept stocks”.

“These are unique companies, burning a lot of cash and are growing rapidly. I am not sure if a mutual fund manager, managing public money, would be comfortable investing in these companies,” he said.

Experts say investors in markets like the US are more matured in looking at companies with innovative business models, though these are far from turning profitable. The ability of such investors might lure Indian companies to look at US listings.

“We would like to see the actual regulations (on start-up listings) come through. It is not so much about regulatory evolution as about market evolution. Some markets have a great understanding of certain businesses. To create that kind of a system requires time,” said S Subramanian, managing director-investment banking at Axis Capital.

Although, Indian rules didn’t permit direct foreign listings till recently, some Indian companies have opted to list in the US markets through the overseas holding subsidiary route, due to the availability of attractive valuations. Makemytrip.com is an example.

With easing of norms to allow direct foreign listings, companies in especially the technology and e-commerce space will be more inclined to list abroad, believe market players.

As most Indian start-ups have private equity investments, the tax treatment in each jurisdiction is also an important factor. “The Indian capital market is competing with other markets to attract quality issuers to list. The regulatory arbitrage is something that companies might want to explore,” said Bassi.

He added a crucial factor, however, which might see some companies list domestically, was “visibility”. “Listing in the home market will help create brand building and awareness. It will also send out a signal that you are committed to that geography.”

So far, only two internet-based companies have listed in India. These are Infoedge, which operates job site naukri.com and JustDial, a local search engine.