Difficult listing norms, better valuations in international listings, ample cheap cash with VCs, and strict reporting requirements are keeping Indian startups away from SEBI's Innovators Growth Platform.
“Listing will provide startups liquidity as also give exit options to the PEs and VCs,” stated the National Stock Exchange CEO with a voice colored in optimism on the backdrop of success of the SME Listing Platform: Emerge.
It’s been over four years now that SEBI has been attempting to get startups listed on stock exchanges, with just 2 choosing to take the path. So, what is causing such abysmal foray of setbacks for the SEBI in getting this breed of companies listed? In today's post, we seek to deep dive into this question – taking a glimpse at the past, SEBI’s unending struggle and the way forward.
A very brief history of the Innovators Growth Platform
A few years back SEBI launched a platform – ‘Institutional Trading Platform’, separate from its mainboard and that of the SME listing platform (Emerge), for easy listing of start-ups. In those times, certain startups like Affordable Robotics (automation solutions provider), E2E (cloud servicing company), Silly Monks (digital entertainment startup), got themselves successfully listed on the SME platform, creating buzz for listing among startups. But, why did SEBI have to launch another platform when startups were getting themselves listed on the SME platform?
Well, one of the key criteria for listing there was profitability! Furthermore, it is not possible for an SME exchange to be an exit route for investors as the market is very small and cannot absorb or cater to full exits. Hence, started the journey for having a ‘start-up platform’.
Over a 3 year period (2015-2018), SEBI made various moderations and relaxations towards the startup listing criteria on the Institutional Trading Platform, but the response remained lukewarm. It then renamed the platform as ‘Innovators Growth Platform’ and further adjusted the criteria, without much luck. At present, only 2 startups stand listed on the platform!
List me if you can!
One key reason behind this has definitely been the difficult listing norms for startups. SEBI here plays a delicate balancing game, loosening the norms just enough to make it attractive to startups, but at the same time ensuring that the best interests of smaller investors are protected. Despite continuous attempts to ease regulations, stringent promoter holding norms and provocative laws for subsequent entry into the mainboard continue to drive startups away.
Valuations are another major concern! Indian startups believe they may get better valuations by listing abroad (Singapore or New York), the reason being investors in these markets are more mature to understand the potential of startups. In fact, it’s not just startups but even investors (venture capital and private equity companies) in these startups who second this argument. Uncertainties about possible liquidity of stocks pose a streak of worry on the foreheads of investors, again guided by trading norms and lack of sophistication among investors.
The third problem is the piles of cash private investors are sitting on. Investors are flooding to private equity thanks to low-interest rates, hedge fund underperformance, and lower expected returns from public markets. This flush of cash means more competition for the same deals among PE firms, thereby driving up valuations. The willingness of these private investors to fund larger rounds at higher valuations discourages startups to go onto the listing path.
Of course, with listing comes the additional burden of reporting requirements often causing pressure upon the already turbulent business scenarios for startups, further acting as a deterrent.
Conclusion: The Way Forward
It is pretty clear that there are lots of spells playing witchcraft upon SEBI’s novel vision of getting startups listed. To put things in perspective, In the SME space, it took six months for the first listing, another six months for the second and now it is 4-5 listing applications a week. It was not so smooth for SMEs either.
For startups too, to get the acceptance would take some time, maybe more relaxations, wait for tougher times in terms of ease of funding and attempts to build in confidence among the startups, PEs/VCs, and the sophisticated investors – and the numbers may grow from what stands at just 2 today! We certainly hope it does, so that Indian investors can participate in the wealth creation journies of our emerging startups!
About the author: The post is written by our EZPP partner Aayush Jhawar with relevant edits and changes by our editorial team. Aayush has graduated from SPJIMR and currently works with the Boston Consulting Group.
Disclaimer: All views expressed in the post are personal, and not related to any organization to which the writer belongs.