A pragmatic perspective on the proposed SEBI startup listing norms

The much awaited Alternate Capital Raising Platform is certainly a welcome initiative at least from an intent perspective. The Government and SEBI seems to have made the right noises in terms of permitting tech, product and e-commerce startups access capital markets as is prevalent globally. The possibility of a listing for a startup is a huge boon as it gives the much needed liquidity of holding an early exit option for investors. Some of the fundamental features of the scheme which require attention are:

• restriction to allow only institutional investors and family trusts of HNIs/ HNIs seems to be a step to protect retail investors which is laudable
• reducing the promoter lock-in period from three years to six months is definitely positive and centric to the industry trends
• dispensation of profitability and business projections is another practical step in the right direction.

The above mentioned aspects though try and eliminate a lot of hurdles otherwise faced by listed companies, the guidelines however have certain serious caveats worth mentioning:

• the minimum capital for listing seems to be Rs 50 crores which effectively restricts the option to Series B and above funding
• the cap of 25% of promoter shareholding in post issue share capital may make the scheme practically impossible for many tech startups which are in their Series A and B funding needs
• the rules are silent on the basis of issue price discovery which needs to be understood since traditional EPS, PE and other ratios may not be relevant in this space.

However, what seems to be missed out is that fund raising is an activity which happens throughout the life cycle of a startup in a conducive and enabling economic environment. With some of the below mentioned fundamental hurdles still haunting the startup eco-system, this proposed option may not yield the desired results:

• Angel tax: Angel tax is a levy on exorbitantly high premiums received by Indian companies from resident investors other than registered VCs and Angels. This has forced many startups to set up shop in Singapore even if they are India centric. Once the holding is held abroad, they become foreign companies hence they are ineligible to access the Indian stock market.
• Cumbersome Export Rules: According to RBI rules, every software company is expected to intimate to RBI via a SOFTEX form the details of every export transaction together with the contractual details and a host of detailed reporting without any threshold for invoice value. Hence your reporting for a USD 1000 or USD 100000 remains the same. In many cases where revenues arise from online platforms like Google, Facebook etc it becomes virtually impossible for these companies to comply with the rules forcing many of them to shift invoicing to locations like Singapore and have India office as development centres. Such entities though successful and might be needing capital, would certainly be looking overseas for fund raising options.
• Bridge borrowings from abroad: Temporary funding needs and borrowings are common during the first few years of startups. With stringent regulations External Commercial Borrowings including elaborate compliance and prior approvals – the rules make it virtually impossible to borrow, especially smaller sums from sources outside India. This has again forced many startups to have their ultimate holding company overseas where they can freely borrow and repay at convenience.
• Highly complicated company law: The New Companies Act has been anything but enabling business environment. The kind of restrictions on loans, directorship liabilities and basic operational surveillance makes the case for doing a serious business in India extremely painful and expensive. The professions law, corporate secretaries and chartered accountants seem to have a feast of a time given the numerous restrictions and compliances involved. This has again forced many companies to look at India only for a stripped down version of inevitable operations with the real meat of funding and treasury activities remaining abroad.

These and many more such enabling hurdles need to be dealt with seriously if the Government and SEBI are to achieve anything close to their anticipated success from startup listing. In the absence of any reforms in the above bottlenecks, there may not be much headway in terms of startup listing as VC funding is otherwise readily available for successful startups. Given the complexion of the scheme- the scheme may initially be tapped by institution backed and institution founded start ups and the rules need some more alteration to make it a success for individual promoter driven start ups which is usually the case in India. Nevertheless this attempt is definitely a great initiative to tap the untapped potential market and needs to be appreciated –atleast for the intent if not the eventual outcome.

About the Author: Divakar Vijayasarathy is the CEO & Co-founder of MeetUrPro.com

(Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the views of YourStory.)