The Securities and Exchange Board of India (Sebi)'s decision to relax the listing norms for start-ups is an important step forward. While many of India's largest e-commerce companies, such as Flipkart and Snapdeal, have been making noises about their plans to eventually list in the US, iSpirit, which played a key role in articulating the requirements of start-ups, had said many others receiving early-stage financing in India will re-domicile to Singapore, partly because of regulations making it easier to accept funding from global venture groups. It is a welcome sign that within hours of Sebi's announcements on Tuesday, the same software trade body talked about the possibility of India's first start-up IPO (initial public offer) this year itself. However, funding requirements for start-ups that were sharply tightened in last year's Budget also need to be looked at if an ecosystem is to be nurtured.
The regulator has reduced the lock-in period for investors in start-ups to six months compared with three years for some IPOs. Also, till now, only companies that have consistently reported profits for at least three of the preceding five years are allowed to list on Indian bourses - a requirement that deterred most start-ups from launching IPOs in India. Compare this with how NASDAQ operates. Amazon, for example, still makes losses but was allowed to list way back in 1997. It's a big relief that Sebi has now waived this requirement for Indian start-ups. The platform, which comes a few years after the US promulgated the Jumpstart Our Business Start-ups (JOBS) Act, is also set to give investors in start-ups an easier exit. According to Thomson Reuters data, about 3,100 start-ups in India have raised $7.2 billion in venture capital and private equity funding since 2013. In the next five years, the total number of start-ups is estimated to more than treble to 11,500, making it the fastest growing start-up ecosystem anywhere in the world.
By mandating that 75 per cent of the shares will have to be sold to institutional investors and the balance to only those who meet the criteria of investing at least Rs 10 lakh, Sebi has kept out retail investors for the time being. The argument is that an average retail investor still needs a lot of hand-holding and has to be shielded from an environment where the disclosure requirements are less stringent. But retail investors can be justifiably disappointed at missing out on possible future gains, and this may be too heavy-handed a regulation.
It would, however, be foolhardy to expect that the new norms will open the floodgates for IPOs by start-ups as a lot of ground still needs to be covered. For one, international investors would still prefer their ventures to list on international bourses since there is higher liquidity in overseas markets. Besides, listing regulations are just one part of the solution. An entrepreneur would obviously want something beyond that - for example, he would look at an ecosystem where there is easier access to early-stage funding, and friendlier tax structures. In that background, it's a welcome move on the part of Sebi to set up a committee, headed by India's original start-up hero, N R Narayana Murthy, to come up with a progressive set of rules to keep Indian companies in India.