TURNING FOCUS ON NEW ECONOMY – Sebi to Smoothen Road to Dalal St for Desi Startups

The Economic Times

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Regulator may ease rule mandating cos to use IPO proceeds to build tangible assets
Market regulator Sebi could ease rules that govern the public listing of shares by startups in India, a move that will remove one of the biggest hurdles cited by new-economy entrepreneurs who now look overseas while planning an initial public offer.
The Securities & Exchange Board of India could scrap norms that require companies to use proceeds from a public listing to build tangible assets or buy plant and machinery, according to a Reuters report, and the regulator is preparing to unveil a consultation paper later this month on listing norms for micro, small and medium enterprises, sources in the department of micro, small and medium enterprises told ET.

“This may include a clause to relook the prior profitability clause for new firms. The paper may also talk on IPO norms for small firms,“ said a government official.

India’s fast-growing Internet and technology product companies, whose main assets include intangible products and services and intellectual property, have found such stipulations onerous. Top Indian companies such as online retailer Flipkart and mobile advertising firm InMobi have domiciled in Singapore and software product think tank iSpirt estimates that nine of the top 30 business-to-business software product companies in India have already relocated to the US, Singapore and the UK.These 30 companies are worth about $6.2 billion (.`38,877 crore), employing almost 18,000 people.

Among those known to be preparing for an IPO in the coming months are online retailers Flipkart, Snapdeal and Infibeam, business-to-business portal IndiaMART and marriage listings site Bharat Matrimony . Of these, Flipkart is almost certain to list in the US. Most of India’s tech companies such as MakeMyTrip, Genpact, Rediff and EXL Services are listed on either NYSE or Nasdaq.

Several founders of technology startups had pressed for easier listing norms during an interaction with Sebi Chairman UK Sinha in Bengaluru in December 2014. An industry executive who advises Sebi on regulation and development of IPOs and other primary market segments, said a meeting took place on February 27 to work out a plan to make it easier for startups to list in India.The decision to open public consultations was made at this meeting, he said.

“We are delighted to see tangible progress being made and are optimistic about reversing the exodus of technology startups over time,“ said Sharad Sharma, co-founder of iSpirt, which fa cilitated the interaction with Sebi and has been a vocal proponent for change in current regulatory norms.

“India must put together quickly a set of initiatives to invite companies such as Flipkart, InMobi and Yatra to list in India and stop more companies migrating,“ said Sudhir Sethi, chairman & managing director of IDG Ventures India, who is leading an industry initiative to `List in India’.

TOUGH LISTING NORMS

Startups cite a variety of reasons for not being able to list in India. Ecommerce companies especially are looking at listing overseas in the long run as Indian rules require companies to be profitable for at least one out of two immediately preceding financial years be fore issuing a public offer of shares.

At present, the minimum post-issue paid-up capital of the applicant company has to be `. 3 crore for an IPO on the BSE. The National Stock Exchange prescribes that no disciplinary action by other stock exchanges and regulatory authorities in past three years should have been taken against the company.

Besides startups, removal of the profitability clause will also help sectors such as airlines, where most companies are loss-making and in dire need of capital. “This will help all services companies, including technology companies,“ said Dinesh Agarwal, founder & CEO of IndiaMART, which market sources indicated is considering an initial public offering later this year. “The rules about use of proceed funds are defined for old-economy companies where the money used to go for capital expenditure such as setting up a plant, buying machinery and buildings. But new-economy companies typically use proceeds for salary and marketing.“

Low valuations in India are also a key challenge. The Companies Act of 2013 allows government-appointed auditors to challenge valuation of shares asked for or prescribed by a merchant banker pre-IPO in a company.

“Even India’s MSME listing rules prescribe that merchant bankers or agents should pick up a small stake in the company they are taking out to IPO, which is counter-intuitive for the industry,“ said Navin K Rungta, co-founder and CEO of legal advisory firm eLagaan.