Start-up IPOs: India Ratings talks of funds misuse risks

The recent decision of Sebi to ease the initial public offering (IPO) norms for start-ups is likely to pose a risk as the funds raised are liable to be misused, says a report.
According to the report by India Ratings released today, while the move will encourage such firms to tap the domestic market to raise funds rather than going overseas, the relaxed disclosure requirements and shorter lock-in periods for promoters "may pose a risk".
On Tuesday, the Securities and Exchange Board of India (Sebi) relaxed norms for start-ups to get listed and raise funds through a dedicated platform on domestic bourses.

"One needs to be wary of start-ups taking advantage of the new flexibilities to raise capital for spurious reasons. An errant promoter may exhibit lack of accountability since the lock-in period for promoters and other pre-listing investors has been reduced to six months as against three years for other companies," the report pointed out.
"The regulators should be cautious that the current mode of capital raising is not misused for saving taxes or making other gratuitous payments."
Furthermore, the report noted that start-ups often try out new business models or products and to that extent, face a high failure rate, and only a few ones are successful in offering outstanding returns.

The rating agency observed that while Sebi has provided flexibility on deciding the basis of issue price as deemed fit by issuers, "most start-ups do not have sufficient earnings and would not be able to use standard valuation parameters such as price to earnings or earnings per share".
"In the absence of any standard valuation metrics, even institutional investors may find valuation a challenge," it said, predicting 'start-up' bubbles in extreme cases.
The report said liquidity of trades in start-ups will be significantly affected as institutional investors also find valuations difficult.