India's proposed new listing rules are no cure-all for hot tech companies eyeing the public markets. The regulator wants to loosen standards to discourage start-ups from going abroad . Though that may not be enough to win over hot names like Flipkart and Snapdeal, it does stop India from joining the race to the bottom on governance.
Alibaba's decision to list in New York instead of Hong Kong has sparked a debate among regulators across Asia. The question is whether countries should ease listing rules to prevent other fast-growing internet companies from choosing to raise capital overseas, or whether they should maintain standards designed to protect investors.
While Hong Kong is still debating the issue, the Securities and Exchange Board of India (SEBI) has drawn up new draft rules. The country's status as the latest hotbed for start-ups adds to the urgency: internet investors have ploughed $4.5 billion into the market over the past 13 months, according to a Morgan Stanley report published in February. The bank reckons the market capitalisation of Indian internet companies could grow from $4 billion today to $200 billion by 2020.
SEBI's proposals address many of the key issues that might prompt Indian start-ups to list elsewhere. Insider or "promoter" shareholders of such companies would only be subject to a six month lock-up period. Backers of other companies must typically promise to hold onto 20 percent of the equity for three years. Issuers under the new rules will also be able to declare proceeds are used for "general corporate purposes" rather than providing a detailed disclosure on how they plan to use the funds.
The main catch is that the new regime will only apply to a small junior market which does not permit retail investors. That is unlikely to be tempting for companies with multi-billion dollar market values. SEBI also hasn't addressed the question of dual voting rights. Though India already allows companies to issue different classes of shares the structures haven't proved popular in their current form.
India is right to resist the pressure to dilute its rules further. Good governance comes at a price, however. Though a number of smaller Indian internet companies may be happy to list on a junior bourse it seems unlikely to keep the country's future "Alibabas" at home.
(The author is a Reuters Breakingviews columnist. The opinions expressed are her own.)