Experts say bourses in the country are likely to continue to be far from becoming attractive for start-ups.
They have said so even in the backdrop of Securities and Exchange Board of India (Sebi) chairman U K Sinha saying the regulator was working on a system for making it simpler for new-age technology-led businesses to list on Indian stock exchanges, Experts say entities in areas like e-commerce, software products and internet-based aggregation have been plagued with issues relating to taxation, fund raising and foreign direct investment (FDI). These prevent India from turning into an attractive destination for doing an Initial Public Offer (IPO) of equity.
“While a change in IPO norms by Sebi is welcome, the same will not change the tide for Indian start-ups entirely,” said Rajiv Khaitan, partner at Khaitan & Co LLP. “It is important for tax authorities and the Reserve Bank of India to bring about a concrete change as well.”
Due to challenges with the existing norms, at least 80 per cent of successful Indian start-ups are registered abroad, though significant part of their operations and businesses are in India. With valuations and businesses of these companies running into billions of dollars, those in the sector and the regulators are eager to stop these companies from moving abroad. Among others, e-commerce majors such as Flipkart (estimated valuation of $12 billion), and Snapdeal (seeking valuation of $5 bn) are expected to look at IPOs over the next few years. Several other large software companies like Druva (estimated valuation over Rs 1,000 crore) and InMobi (estimated valuation over $5 bn) are also expected to see investors exit through an IPO.
“In the US, the method of evaluation for start-ups is very different when compared to India. Often, the stock exchanges value the business model and if it has potential, the companies are allowed to list, even if not immediately profitable,” Khaitan said. “Take e-commerce. Most companies in the sector globally are not profitable but many are still listed in the US. However, in India, there is the past profitability clause and a company that does not have three years of profitability will find it really hard to do an IPO here.”
Highlighting other issues that could stop these companies from listing in this country, Jeenendra Bhandari, partner at MGB & Co LLP, says the structure of several e-commerce companies might not be compliant with Indian FDI norms, which would bar them from tapping the domestic bourses.
While there are several details relating to an India listing that start-ups see as a hurdle, 'definition of a promoter' is seen as a key one. By the time start-ups reach a stage where they can head for an IPO, the founders have diluted their holding to single digits in several cases, which does not meet Sebi's promoter shareholding norms. The venture capital fund that holds most stake does not wish to clubbed as a promoter because of the lock-in requirement after listing, which forces a promoter to stay invested up to three years post this event