Globally, the IPO market has been sizzling with a new breed of e-commerce, social media and mobile technology firms making a debut. Not in India, though. Startups here including Snapdeal, Flipkart, Paytm and InMobi have been knocking on the doors of private equity investors and studiously avoiding public markets. Market regulator SEBI, worried that interesting companies would completely bypass Indian investors, has opened a platform for startups to list without much red tape — the institutional trading platform.
What is it?The institutional trading platform (ITP) will be a new window on stock exchanges where e-commerce, data analytics, bio-technology and other startups can list and trade on their shares.
To encourage early-stage ventures to list here, SEBI has relaxed many of the more stringent rules governing IPOs. On the ITP, promoters’ capital will be locked in only for six months, against the three year lock-in for normal IPOs. There is also no need to make elaborate disclosures on how IPO funds will be used.
The company that lists on the ITP will be given an option to migrate to the main board after three years. However, having relaxed many rules that protect investor interests in IPOs, SEBI has made sure that only institutional investors and HNIs invest in the new ITP.
The minimum application requirement for participation in these IPOs has been set at a high ₹10 lakh. Only institutional investors and investors other than retail individuals will be allowed access to the new platform.
Note that this is not the first ITP being introduced by SEBI. An ITP for small and medium enterprises was opened up in 2013 and will continue to function parallely.
Why is it important?India is losing the race with other global markets on the market capitalisation of its listed universe. India’s public market hasn’t grown much in recent years compared to China or developed markets, though many Silicon Valley enterprises are powered by Indians.
Also, if exciting new-age companies in India skip domestic listing and go overseas, how will young Indians participate in their growth story? If startups are encouraged to list locally, the listed universe can expand. This can draw in dollar trades by FPIs in these companies, which would have been otherwise lost to Singapore or the US.
Why should I care?Valuations of internet companies have zoomed in the last few years giving their investors mind-boggling returns. But Indian investors, even the ones with the appetite for such risks, have lost out on the opportunity with most tech startups in the country taking the private equity route to funding or going outside India to list. A classic example is the home-grown MakeMyTrip, which was listed in Nasdaq a couple of years ago.
Now that SEBI has opened up the ITPs, more internet startups may list in India and you may also get to ride the e-commerce boom.
Yes, many of these startups may not be profitable and are still testing the waters on what is the right business model and market strategy. But by sheperding them on to the new ITP, SEBI is ensuring that those who have the stomach for risks can take it.
The bottom lineIf it takes off, the ITP will give Indian promoters and private equity investors an easy exit from startups. Yes, it is risky for investors, but who is to stop them if they want to get in on the hottest trade in town?
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