Pressing question before India's tech unicorns: Where to bring an IPO?

Internet initial public offering (IPO) news is coming from all corners: Flipkart, PolicyBazaar, Zomato, Ola, Freshworks, PepperFry, Nykaa and Delhivery are all at various stages of finalising their plans. According to an HSBC Global Research report, more than $60 billion was invested in India’s internet sector in the past five years – around $12 billion of that in 2020 alone. There were 34 unicorns in India as of February, according to research firm Tracxn.
 
However, there is a bump. Most Indian start-ups are loss-making. Securities and Exchange Board of India (Sebi) rules make it nearly impossible for loss-making companies to list on Indian bourses National Stock Exchange (NSE) and BSE. Also, a set of Indian start-ups are listed in Singapore or held by a holding company there; these cannot list in India.
 
Finally, investors and C-suite executives feel that Indian public market may not support the lofty valuations of venture capital-backed internet businesses. In the internet space, growth and market size – ie “potential” – are rated higher than cash flow and profits when it comes to valuing a business. This is not the case in the US, where public markets are deep-pocketed, investors are generally more clued-in into tech, and regulations are far more sophisticated.
 
This is a problem for India. Should a portion of the potential tech IPOs be lost to Nasdaq, Indian investors stand to lose billions of dollars in wealth creation, and, so do other intermediaries like fund managers who gain from IPO-related work. For a couple of years, Indian exchanges and Sebi have tried to woo tech start-ups. They launched a separate exchange and eased certain requirements recently to make it more attractive.
 
Where to list is a decision that takes cues from a lot of factors, but what make or break a deal are the rules around listing in any country. Business Standard breaks down key listing requirements in India, in the US and the possibility in a few other scenarios.
 
Listing in India: NSE, BSE
 
There are two possibilities: listing on the regular exchanges – NSE and BSE – or listing on the newly created Innovator Growth Platform (IGP).
 
Regular listing is the preferred route. Here, Sebi's Issue of Capital and Disclosure Requirements (ICDR) regulations permit only profit-making companies to list on the stock market. They must show pre-tax profit of at least Rs 15 crore a year in three of the preceding five years. This essentially cuts out all or most of the tech-start-ups in India.

There is, however, a provision. If loss-making start-ups have to go for a listing, they must float 75 per cent of their net public offer to only qualified institutional buyers (QIBs), including insurance, mutual fund companies, and alternative investment funds. Only 25 per cent of the offer can be subscribed by retail investors, including high-networth individuals (HNIs). This is seen as a disadvantage.
 
A few other rules should also be noted. One is the requirement of a minimum promoter contribution. Promoters of a company going public must necessarily lock in 20 per cent of their post-IPO shareholding for a period of three years after listing.
 
To attract tech-start-ups, Sebi in 2019 created a separate platform called IGP with more relaxed regulations. This March, rules were further eased. For a company to list on IGP, its 25 per cent pre-issue capital needs to be held for at least two years by institutional investors. Sebi has eased this requirement to just one year. It has further said that open offer for IGP-listed entities will be triggered at 49 share acquisition, compared with 26 per cent earlier, and it has even made delisting requirements easier. IGP has not seen any listing so far.
 
Listing on Nasdaq
 
A company has four ways to get listed on the Nasdaq based on its underlying fundamentals. It has to comply with one of the following scenarios:
 
Scenario 1: The entity must have combined earnings of $11 million in three prior years and no single year should be a net-loss year.
 
Scenario 2: The entity must have a combined cash flow of at least $27.5 million in the past three years, with no negative cash flow. Also, its average market capitalisation in the preceding 12 months must be at least $550 million, and revenues in the previous financial year must be at least $110 million.
 
Scenario 3: Entities can skip the cash flow requirement if their average market capitalisation in the past 12 months is at least $850 million and revenues in the prior financial year are at least $90 million.
 
Scenario 4: Entities can skip the above requirements and decrease their capitalisation to $160 million if their assets total at least $80 million and their stockholders' equity is at least $55 million.
 
To stay listed on the Nasdaq, a company must continue to meet at least one of the above mentioned conditions, or risk being delisted. The fact that Nasdaq has such diverse requirements allows it to encourage a varied set of companies to come for an IPO.
 
MakeMyTrip and Yatra.com have taken this route and had successful stints in the US markets. Sebi rules also allow Indian companies another route, which is the dual-listing mechanism. Indian companies listed on Indian bourses can list their shares via American Depository Receipts or Global Depository Receipts (ADR and GDR) on Nasdaq. Major companies like Infosys, HDFC Bank and ICICI Bank have taken this route.
 
Nasdaq listing through SPAC
 
SPAC, or Special Purpose Acquisition Company, a vehicle popular in the US, is not drawing much interest from Indian companies. A SPAC is a holding company which has the sole purpose of acquiring private companies from the money it raises from an IPO. Simply put, a SPAC will list itself on the exchange and then move on to acquire other companies, and allot its shareholders shares in the acquired entity. The gain here is that it enables companies to access public markets without themselves having to go through the tedious process of an IPO. According to a Wall Street Journal report, SPACs have raised $38.3 billion in IPOs since the start of 2021, compared with $19.8 billion by traditional IPOs.
 
This is a legitimate alternative for Indian companies to access the US markets, as against a direct listing which is impossible unless the holding company is also listed in the US. The US SPAC has to register itself as a Foreign Portfolio Investor (FPI) in India and can help take an Indian company public. There are reports suggesting Indian founders are considering this route.
 
What about Singapore-incorporated firms?
 
It is a known truth that many Indian companies are incorporated in Singapore for tax purposes. Corporation tax rate in India is 30 per cent, compared with 17 percent in Singapore, dividend distribution is not taxed there, and sales tax in Singapore is flat 7 per cent, compared with 5-28 per cent in India. The biggest reason, in fact, is that capital gains tax in Singapore is zero.
 
This is the reason why Practo, Grofers and several Indian start-ups are listed in Singapore. This is also why Flipkart moved its holding company to Singapore prior to its deal with Walmart.
 
For now, a Singapore-incorporated entity cannot list on Indian exchanges. It can either list a part of its business that is housed in an India-registered entity, or transfer the business to the India entity which gets listed. SPAC listing is also a way.