Founders and investors laud BSE’s move, say it will allow easier access to capital, bring liquidity to early-stage investments, and boost the startup ecosystem.
The wealth generated through Infosys stock is the stuff of legend. From a market capitalisation of $10 million 25 years ago, it stands at $40 billion today. Now, many startups in India can dream this very dream with stock exchanges wooing them to list on their platforms.
Asia's oldest bourse, BSE (formerly Bombay Stock Exchange), is inviting young companies to come on to its new platform, the BSE Startup Platform. This development comes as a boost and vote of confidence for startups in India where the option of exit for investors and raising of capital by entrepreneurs has always been a challenge.
In a circular, the BSE said: “To provide further incentive to companies which are 'startups' in sectors like IT, ITeS, biotechnology and life sciences, the exchange is pleased to announce that the BSE Startup Platform has been enabled in the BSE SME Segment.”
The new platform will go live on July 9.
The BSE is the second bourse to launch such a facility after the National Stock Exchange (NSE). The NSE’s Emerge - Institutional Trading Platform lets startups list with or without an initial public offering (IPO), and connects them to a pool of sophisticated investors.
With India becoming the third largest startup base globally, this move will help expose these companies to different forms of capital and also bring better transparency in terms of valuation, corporate governance etc. The expectation is that these alternative trading platforms will be further strengthened to give startups much-deserved visibility.
Ritesh Agarwal, Founder and CEO, OYO, says, “This is an empowering initiative from BSE and an encouraging step for startups looking to scale up and seeking access to capital. These measures will provide ease of access to emerging companies for getting listed on a national exchange while giving a boost to the Indian startup ecosystem in terms of funding, by lifting investor confidence.”
Rutvik Doshi, Managing Director, Inventus Capital Partners, also welcomed the move, saying, “Such an option was not available a few years ago and in the next one or two years, one will see several startups and VC funds working towards this.” Inventus Capital is working on the possibility of two-three companies in its portfolio working towards the option of listing on the stock exchanges in the next two years.
The big advantage of such a listing is that the startups need not go through the conventional initial public offering even as they get access to a credible class of investors.
The criteria for listing
According to BSE, the startup platform will facilitate the listing of companies in sectors such as IT, ITES, biotechnology and life science, 3D printing, space technology, ecommerce, hi-tech defence, drones, nano- technologies, artificial intelligence, big data, virtual reality, e-gaming, exoskeleton, robotics, holographic technology, genetic engineering, variable computers inside body computer technology, and any other hi-tech company.
The exchange has listed out the following criteria for the listing:
* The pre-issue paid-up equity share Capital of the company should be minimum of Rs 1 crore.
* The company should be in existence for a minimum period of 3 years on the date of filing the draft prospectus with BSE.
* The startup should preferably have an investment by QIB investors/ angel Investors for a minimum period of 2 years at the time of filing of draft prospectus with BSE, and such aggregate investment should be at least Rs 1 crore.
* The company should have positive net worth.
* The company should not have been referred to National Company Law Tribunal (NCLT) under Insolvency and Bankruptcy Code, 2016.
* There should be no winding up petition against the company that has been accepted by the National Company Law Tribunal (NCLT).
Broadening startups’ reach
Describing the new platform as a shot in the arm for startups, Jitendra Jagadev, COO and Co-founder, Nestaway Technologies, says, “This development will further propel the category in the right direction. One can expect better corporate governance standards and more transparency in fundraising and valuation.”
Aditya Sanghi, Co-founder and CEO, Hotelogix, agrees.
“Getting listed with BSE will help startups increase their leveraging capacity to raise fresh capital from banks and investors at a comparatively low cost and with relatively relaxed regulations,” he says.
The listing of startups on such alternative investment platforms broadens their reach with the investor class.
Siddharth Pai, Founding Partner and CFO, 3one4 Capital, says, “This will ensure the participation of institutional investors and high net worth individuals in startups. A trading velocity with high liquidity of shares is good news for promoters, employees, and investors.”
Need for compliance
Startups listing on these investment platforms will have to go through a different kind of journey, one that goes beyond their products or business - compliance.
Shriram Subramanian, Managing Director of InGovern, a proxy advisory firm, says startups will feel the pressure of compliance. “Small companies will need capital to grow. So unless they have better governance and parameters in place, they will not be attractive to investors.”
Siddharth adds that these startups will need a lot of handholding to meet with the compliance requirements. These compliance requirements will include coming out with regular financial results, intimation of board meetings, disclosure of price sensitive information, grievance redressal mechanism, disclosure of class of shareholders etc.
The challenges ahead
However, there are certain challenges before startups can start thinking of taking the listing route.
Rutvik, of Inventus, says, “Most startups had the mentality to grow, or go bust. Nobody was thinking of this middle path, which is a viable option and maximises outcomes for every stakeholder.” Opting for this will need a shift in mindset, he adds.
At the same time there are also certain inherent issues in terms of getting the momentum on such trading platforms.
Divakar Vijayasarathy, Founder and Managing Partner, DVS Advisors, says, “One needs to realise that the SME platform is not a popular category due to inherent liquidity challenges.”
However, he lauded this move by the regulators as earlier transactions were largely closed-door ones; now, the opportunity is open to other class of investors.
The biggest challenge on such platforms is the lack of participation from the retail class of investors, who actually provide the momentum. Pai says, “Retail investors create the buzz around the stocks and it is crucial that they participate.”
One thing’s clear: a start has been made.
Shriram, of Ingovern, says, “Only after the listing platform matures can investors can think exits through this window. It will take at least two-three years to stabilise. Initially, it will be viewed with some grain of suspicion, just like in the case of the SME exchange. I expect that even if five to 10 companies get listed on the platform, it will be a major achievement.”
The NSE and BSE have started actively wooing startups though industry observers believe that the bourses need to spruce their PR and branding machinery to ensure that there is greater awareness on the availability of such trading platforms.
Ritesh, of Oyo, says, “The other recent initiatives, such as the SEBI panel working towards creating a framework to help startups get listed, are also major contributors in creating a more structured market, seeing that many new firms are in unfamiliar territory when it comes to compliance norms. These and other initiatives will encourage more and more people in the country to turn entrepreneurs."
(Disclaimer: Siddharth Pai, Founding Partner and CFO, 3one4 Capital is an investor in YourStory)