How new SEBI guidelines will make the IPO dream a reality for startups

New SEBI guidelines on a separate platform for startups looking for an IPO are aimed at giving young companies easier access to capital and bring in a new class of investors.

For young, growing startups, an initial public offering (IPO) may no longer be a distant dream.

For some time now, the market regulator and stock exchanges have been working on making an IPO easier for startups. Recently the Securities and Exchange Bureau of India (SEBI) further relaxed these norms for listing on Indian stock exchanges, including the BSE (formerly the Bombay Stock Exchange) and the National Stock Exchange (NSE).

With the formal notification due in February, exchanges could well begin wooing young, growing companies very soon.

In October 2018, SEBI proposed changes in its Institutional Trading Platform (ITP), which was initially launched in 2013 to promote SMEs to go public, and relaunched it as Innovators Growth Platform (IGP) to encourage more startups to go public.

T V Mohandas Pai, Co-founder of Aarin Capital, tells YourStory:

“IGP offers huge scope for companies on the fast trajectory, as funds are flowing into Indian stock markets and investors are looking for stocks with high growth potential.”

What’s different about the IGP?

To be clear, in 2015, the regulator allowed startups to list through the ITP too. However, this was almost a non-starter because of the conditions put forth to startups, such as furnishing financials of three years, and showing that they were either making a profit or had a positive net worth - often not possible for firms on the growth track.

The big change in the new IGP policy framework is that it does away with the earlier requirement for a company to show its financial track record for the previous three years. Now, the track record requirement has been done away with, though the guidelines recommend that companies should have raised at least a Series B round. This often occurs early enough in a startup’s journey.

Ishita Vora, Head – Listings (Equity & Debt), NSE, told YourStory,

“This is a great step to boost the liquidity in the startup ecosystem across funding stages. IGP will help unlock the value for mature investments and diversify funding as well as liquidity for early to mid-stage startups."

But not every startup is a high-growth company. Many struggle to raise growth-stage funding: i.e. Series C and beyond. So a separate platform that allows them to raise funds from investors besides VCs and private equity (PE) firms is a welcome move.

An IPO would throw open the door for participation from a wider class of investors, including mutual funds, high net worth individuals, financial institutions, etc. It would also give angels and other early investors a much-needed exit route.

A 'liberal framework'

Startups looking at IPOs through this route will be able to raise capital much more easily and will also have greater operational freedom. Industry observers believe that an IPO through IGP will create a “level playing field”.

Speaking about the new IGP policy framework, T V Mohandas Pai told YourStory:

“This is a liberal framework for startups, and companies must take advantage as there is also a tax benefit. This enhances returns for investors and sets a market price.”

Both BSE and NSE already have separate listing platforms for smaller companies (SMBs), where startups too will be included. NSE calls it Emerge-ITP. BSE calls it the startup platform under its SME platform, launched on July 9, 2018. The ground is set.

Globally too, there are dedicated platforms that focus on the startup segment, be it Market of the High Growth and Emerging Stocks (MOTHERS) of the Tokyo Stock Exchange, or ELITE at the London Stock Exchange. These exchanges have a broader set of investors, which further enhances the growth of the startup ecosystem.

While listing on the Nasdaq or other overseas exchanges might seem enticing to startups, industry observers believe it is better for startups operating in India to capture that value within the country.

Mohandas Pai, who is extremely vocal about his support for startups taking the listing path, says:

“It is time Indian startups grew up and built a brand for themselves.”

Pai believes that any startup with a revenue of $10 million and above should seriously consider an IPO.

Who can invest in startups listed via IGP norms?

Ishita feels there is a need to deepen the potential pool of investors on the platform to ensure it succeeds as a trading segment. “It is critical for us to tap HNIs, FIIs, and DFIs, including mutual funds, banks, and insurance companies, to ensure improved liquidity and valuations for startups.”

She adds,

“This also gives an opportunity for public market investors to diversify their portfolio into higher return investments with potentially higher risk profiles, particularly at an early stage.”

 What are the challenges?

However, the IGP framework does not encourage the participation of retail investors on the platform as the investment threshold is fixed at Rs 2 lakh.

But Ishita says this is the right decision. “At this point, the platform only allows investors with minimum allotment size of Rs 2 lakh. [This] has been decided to keep retail investors at bay as some of these investments will carry higher risk profiles than mature, traditional companies. These investors can come in after a year once trading history and coverage is established.”

As of now, the IGP also does not address the issue of differential voting rights. Industry observers say some startups may be wary of an IPO as they have differential voting rights of investors and bringing them on-board may be a challenge.

Attracting startups to go the IPO route

Nevertheless, stock exchanges are pushing hard to steer startups towards the IPO route by educating them about the various possible benefits.

Ishita says the NSE has been actively involved in providing inputs to create the regulatory framework of this platform. It has also been leading conclaves to spread awareness about public markets in the startup ecosystem.

“NSE has premium positioning in the listing markets and we ensure high governance and gate-keeping guardrails. We believe this segment has the potential to offer significant value to the startup ecosystem, and we will work closely with startups and funds to help them on-board the segment," Ishita explains.

Having said that, a listing doesn’t mean a startup’s work is done. The road stretches far beyond that.

As Mohandas Pai says, “Just listing by itself is not enough. Founders have to market the company and meet investors. Steady marketing creates a following; that is what gives a startup value.”