Sebi ruling on DVR cheers startups, but can it stop international listings?

The recent ruling on differential voting right by the Securities and Exchange Board of India (Sebi) has sent cheer across the startup sector, but many startups would still wait and watch before they decide on their listing plans options.

Sebi has said that promoters/founders who have net worth of Rs 1,000 crore can now have superior voting rights. A long pending demand from the startup ecosystem, with this ruling many founders and investors that Business Standard spoke to said that India is now at par with ruling in several other overseas markets, especially the US.

However, many players from the startup ecosystem also said that while this is a huge boost for tech startups wanting to list in India, whether this will reduce the number of companies wanting to list overseas will need to be evaluated.

“These are very interesting times to be in the Indian startup ecosystem. I am very excited to see firms like Zomato, Freshworks (which went for IPO) and many other companies lined up to go public. It is fascinating to see their success and IPO, especially in India,” said Vamsi Krishna, chief executive officer and co-founder of edtech firm Vedantu, which just turned into a unicorn or a startup with a valuation of over $1 billion, after a $100 million funding round. 

Vedantu is planning to go for an IPO by 2024. But Krishna said it is still early and one of the advantages the company has is the time to process, how these companies are faring, and how these rules and regulations are also shaping up. 

“Because Vedantu is an Indian brand and we primarily operate here, my preference would be to list it in India and if everything continues to be as exciting as it is now,” said Krishna.

Industry experts and players also said that listing in the US or international market is also about the valuation and access to funding. “For companies that have India focused businesses, especially consumer-tech firms with focus on the Indian market, listing in India now can surely be an option, especially after Zomato. But then there are SaaS players who are better valued in the US markets. Or Startups have got into a structure that makes it conducive to list overseas. We will have to wait and watch,” said an investor of a VC firm on condition of anonymity.

One of the bones of contention even in this is the threshold of Rs 1000 crore. In 2019, Sebi had issued a framework for the issuance of superior voting rights shares. However, not many companies were able to take its advantage as it was considered too  restrictive. Earlier, such shares could be issued only by individuals who were part of a promoter group with net worth of less than Rs 500 crore. The threshold has now been increased to Rs 1,000 crore.

Rameesh Kailasam, CEO, Indiatech.org, which has been working with SEBI for the past three years to bring in regulations that favour startup listing in India said: “We welcome SEBI's decisions to further relax the threshold on SR shares and timelines for their issuance. Our stand has been that ideally the net worth clause should not be applicable to any first time entrepreneur or any founder who has not listed before in India.”

Various industry bodies have suggested to SEBI that the threshold limit should not be there for first time entrepreneurs or for founders who have not listed any of their startups before. Since SEBI has concerns when it comes to old economy promoter driven companies it has been taking step by step action on this.

"The good thing Sebi has done is that the "net worth" of your securities in the company that is giving you these DVRs (Differential Voting Rights shares) will not be counted. So what that means, say in Zomato's example, that they will take Deepinder's net-worth, they will not include the worth of Zomato shares. They will look at all the other assets except for Zomato shares. If it’s less than, let's say 1000 crores, he can actually go for these DVR shares. It's just that it's a huge positive step forward and this also makes India more attractive right now,” said Siddarth Pai, founding partner of 3one4 Capital.

He further added: “The question coming up in everyone's mind is when they do that early liquidity, can they not exit not at 1000 crore value but 900 crore value (exit gain) so that we remain below the 1000 Crore threshold. So that becomes the only change that I see people actually making."

Top venture capitalist Sanjay Swamy, managing partner, Prime Venture Partners said it’s great to see a conscious effort by Sebi to make India listings easier, while aligning the founders for the long-term. He said promoter ownership and control is an important factor in a late-stage or publicly traded company - and this is an important construct for tech companies where equity financing which is a critical requirement but results in promoter dilution.

“As early-stage backers, at Prime, we would love to see more and more focus on ensuring that doing business in India is easier for all founders throughout the lifecycle of a company - setup, name choice, banking, funding rounds, to exits via trade sale, IPO or in some unfortunate cases shutdown,” said Swamy.