Sebi-appointed panel considers 'Snapchat model' to boost start-up listings

Regulator-appointed panel discusses proposal to allow listings without voting rights

The Securities and Exchange Board of India (Sebi) is mulling a ‘Snapchat model’ for facilitating listing of Indian start-ups. The multimedia messaging app offered shares without any voting rights during its initial public offering (IPO) last year.

A Sebi-appointed committee, to revive start-up listings, discussed the proposal of allowing companies to sell shares with differential voting rights at its first meeting held last week, said three people in the know.

Snapchat’s move caught the market’s fancy as it allowed founders to tap the market without giving up the freedom on decision-making and helped avoid greater shareholder scrutiny that came with raising public money. Sebi’s previous attempts for start-up listings have failed to excite the market. Sources said most committee members listed ‘ceding control’ as a key consideration, preventing start-ups from going public.

Contrary to an established firm with steady business and cash flows, a start-up burns cash in initial years and experiments with newer business models. Also, typically the decision-making at new-age companies is driven by a select few, usually the founding members.

Against this backdrop, the Sebi panel felt allowing start-ups to sell shares without giving up control could be a game changer. Start-ups raise capital at several stages. 

At each stage, the stake of the founding members gets further diluted. 

This could lead to an upheaval in the management, often resulting in the ouster of founding members as seen in cases such as Uber and Snapdeal. Experts say the proposal on differential voting rights could be welcome, provided there are enough checks and balances in place. 

“It is a good proposal since it allows a start-up to separate its ownership and economic interests. There are also similar provisions in the Companies Act known as differential voting rights. Such provisions will allow the boards of start-ups to take decisions that are in the best interests of the company without having to fear a corporate coup or backlash from the minority shareholders. However, having a strong corporate governance structure is a prerequisite for allowing any such provision,” said Sudhir Bassi, partner, Khaitan & Co.

While the Snapchat model was hailed by one section, it also raised concerns over accountability.

In the absence of voting rights, there is always a fear that interests of minority shareholders could be overlooked. To address the issue, the panel discussed restricting the platform to only seasoned institutional investors such as private equity. The panel also discussed allowing a single institutional investor to purchase more than 30 per cent of the stake in a start-up during or after listing.

According to current regulations, no single institution can own more than 10 per cent in a single company.

The committee also discussed a system to evaluate start-ups. The valuations of start-ups work in a different manner, compared to regular companies. There are concerns over the use of traditional financial metrics such as price-to-earnings, price-to-book, and operating margins not fairly reflecting the value of a start-up.

“Sebi’s new committee on start-up listings is a step in the right direction. Creating a meaningful platform where quality start-ups can attract investments under a well-regulated framework. It will also allow the investors who have been keen to participate in alternatives but somehow got left out to purchase exposure in the secondary market. Start-ups will be able to unlock valuations, discover pricing, raise capital, and provide exits to very early-stage investors,” said Rajat Tandon, president, Indian Private Equity and Venture Capital Association. The market regulator first introduced a special platform to encourage start-up listings in 2015. Termed institutional trading platform, it failed to gain much traction. Instead it was seen as a mechanism to evade capital gains tax.

Sources said the Sebi committee will conduct further consultations with all stakeholders and submit a report to the market regulator next month.

What is the ‘Snapchat model’?

• Several start-ups resist coming to public markets fearing loss of control
• Snapchat came out with $3.4-billion IPO in March 2017
• The company, however, offered stock with no voting rights
• Snapchat also did not provide investors with revenue forecasts
• Steps were aimed at keeping regulatory burden low to ensure no business hindrance