The Securities and Exchange Board of India’s move approving start-ups to list and raise capital from domestic markets through the Institutional Trading Platform (ITP) will not only open up fresh funding avenues for budding entrepreneurs, but will also discourage them from choosing alternate listing platforms like NASDAQ in the US and AIM in the UK.
While the Sebi, for now, has restrained small investors from participating in such issues, experts say that evolved individual investors who want to participate can do so by adopting the mutual fund route or alternate investment funds that decide to invest in such companies.
Earlier, start-ups were limited with options of either raising funds from angel investors or a venture capitalists and banks. Successful ventures such as Flipkart and Snapdeal have relied on private equity and venture fundings over the years and have witnessed significant dilution in promoters’ equity holding in the company.
Even bank fundings do not come easy. Banks charge higher interest rates from start-ups on loans, and that too after rigorous checks. With a sharp rise in the number start-ups and some of them looking to raise funds from markets abroad, investment bankers feel that the move was needed in a bid to protect the interest of Indian capital markets. “It is a good attempt to ensure that our capital markets are not exported out,” said, S Subramanian, MD & head of Investment Banking, Axis Capital.
Industry experts feel that it is a great facilitative move and will nurture entrepreneurship going forward. “Typically, start-ups got funding from angel investors or venture funds but this will now open way for institutional investors to invest in such companies,” said Sanjeev Krishan, leader, Private Equity, PwC India.
Expanding the scope of the ITP for companies to raise funds, the Sebi said, “The said platform will be made accessible to companies which are intensive in their use of technology, information technology, intellectual property, data analytics, bio-technology, nano-technology to provide products, services or business platforms with substantial value addition and with at least 25 per cent of the pre-issue capital being held by qualified institutional buyers (QIBs).”
Are the institutional investors ready?
While retail investors have been kept out, questions are also being raised over institutional investors’ appetite for such companies given the low level of understanding of such business models in India as start-ups are not making profits or generating positive cash flows.
In the absence of regulatory permission in India and some other markets, the New York Stock Exchange has emerged as the preferred destination for a lot of these firms to get listed as investors in the US are thought to be more learned about the growth prospects of such businesses. While Flipkart has been reported to be preparing for NYSE listing, China’s Alibaba got listed last year. However, experts say that institutional investors are ready to invest in such issues in India. “Most of the global institutional investors are here in India and so if an issue can succeed in US, there is no reason why it can’t in India,” said Subramanian.
While there are some differences between how India plans to go ahead and how US does it, markets see it as a good start. Also, in India investors can directly go to the issuer in a primary market issue but that is not how it works in US. There the investor has to go through a broking firm.
When an issue is listed, the broking house informs its customers about the same and then bids on behalf of its eligible customers who agree to participate.
Since the issue is underwritten by investment bankers, the broking house gets the share allocation through the investment bankers.
What’s in for you?
While start-ups are considered to be risky and experts point to a low success rate of around 3 out of 10, the regulator has decided to keep retail investors out of the institutional trading platform and participating in such issues. By keeping the minimum application amount in such issues at Rs 10 lakh and the minimum trading lot at the same amount, the regulator has created an entry barrier for retail investors. A market expert said that unlike India there is no minimum investment size criteria in the US.
But is the limit too high and will it keep even evolved investor out? Experts say no.
“The Rs 10 lakh limit seems to have been brought to allow evolved investors who can do their due diligence participate in such issues. I think it should be not be seen as tightening of initial public offering (IPO) rules but as dilution of the Institutional Trading Platform. And once the companies mature and grow in three years they would be allowed to migrate on the main board of the exchange if they meet the bourse’s requirements,” said Prithvi Haldea, founder chairman of Prime Database.
He added that since the mortality rate of start-ups in the technology space is very high, retail investors should not invest directly into such companies and can instead take the mutual fund route to participate in such stories.
“Mutual funds are allowed to participate in such companies. So if there are specific schemes that invest into start-up companies or their existing schemes invest a part of their fund into such companies, then those interested can go through them,” said Haldea.
There are others who agree to this. “Going through a fund manager not only helps you with professional advice but also helps you diversify your risk across several start-ups and thus reduces the scope of capital erosion, which may be high in individual company exposure,” said Krishan.
* Listing will happen on the Institutional Trading Platform (ITP) and will facilitate capital raising for start-ups.
* The platform will be made available to firms that use technology, IT, intellectual property, bio-technology, nano-technology to provide products and services.
* No person can hold 25% or more of the post-issue share capital.
* The lock-in period for the entire pre-issue capital will be 6 months for all shareholders.
* Only two categories of investors — institutional investors and non-institutional investors (NIIs) other than retail individual —investors can participate.
* The minimum application size will be Rs 10 lakh and minimum trading lot also will be Rs 10 lakh.