India’s startups have never had it so good.
In 2014, more than $5 billion (Rs25,000 crore) in startup funding poured into Asia’s third largest economy—three times more than what was invested the year before. Alongside, valuations, particularly in e-commerce companies, are rocketing.
In the next five years, the total number of startups is estimated to treble to 11,500, making it the fastest growing startup ecosystem anywhere in the world.
And key institutions, like India’s market regulator, which have mostly watched from the sidelines, are finally making the right noises.
On March 22, for instance, the Securities and Exchange Board of India (SEBI) said in its board meeting that it will come out with separate norms for startups that want to list in India.
It also announced measures like setting up of an institutional trading platform, where investors can specifically trade in startup securities; a crowdfunding platform to help source funds; and some tweaks to the existing issue of capital and disclosure (ICDR) regulations. The ICDR regulations are central to the initial public offering (IPO) process.
Some of these will certainly help, as major startups like e-commerce giant Flipkart mull over listing in the US or Singapore. These countries, of course, are also attractive to Indian startups because of access to early-stage funding, and friendlier regulatory and tax structures.
But to find out exactly what Indian entrepreneurs want from the likes of SEBI, Quartz reached out to a few startup founders and industry experts.
Less profits, more value
Right now, only companies who have consistently reported profits for at least three of the preceding five years are allowed (pdf) to list in Indian bourses.
This deters most startups, especially in the internet and technology businesses, from launching IPOs in India.
“Indian stock markets don’t allow most of us to list because although we have valuable businesses, we still make losses,” said Alok Kejriwal, CEO and co-founder of online gaming service Games2win, and founder of Contests2win group of companies.
Outside India, Kejriwal explained, things are different. “Look at Amazon, it is valuable business but still makes losses, however it has been favoured by investors,” he said. The Seattle-headquartered online shopping website listed on the NASDAQ in 1997.
Indian stock market investors typically look at high-value stocks and are tepid towards new firms. That makes them averse to companies who do not have a profitable proposition, something which is not working out in favour of startups.
SEBI is also said to be working on revising rules on where the proceeds of an IPO are invested.
Typically, the regulator expects the funds to go towards investments in fixed assets. But since startups, mostly tech, don’t have huge capital investment, it makes it difficult for them to stick to this rule.
“There is no capital investment that goes into acquiring fixed assets,” said Siddhartha Pahwa, CEO of Meru Cabs, a mobile taxi service. “So these businesses won’t be able to do that since they would essentially invest towards their consumers or the marketplace.”
“I appreciate that SEBI has certain concerns but now it should relax these norms to attract Indian entrepreneurs,” Pahwa added. ”If better listing norms are introduced, then Meru as an organisation will be very keen to list in India.”
Some believe that Indian startups look abroad for tapping capital markets with an eye on attracting international investors, mostly venture capitalists and private equity funds.
“Very often, international investors would prefer their ventures to list on international bourses since there is higher liquidity in overseas markets,” said Sanjeev Bikhchandani, founder and executive vice chairman of Info Edge, which owns job portal Naukri.com and online realty marketplace 99acres.com, among others.
Valuations abroad also tend to be higher, compared to India, he added.
Bikhchandani listed Info Edge in India in 2006. It was one of the earliest and most successful—the issue got subscribed 55 times—listing of an Indian internet company. The other major listing was that of Just Dial, a search engine, seven years later in 2013.
Some others like online travel services firm MakeMyTrip launched their equity issuances outside India.
Entrepreneurial brain drain?
If India does not make it easier for startups to list on its bourses, there is a possibility that some of the country’s finest entrepreneurs and potentially blockbuster businesses will simply make it a habit of going elsewhere.
“We hope the other regulators and the government also take note of the fact that many of these are technology companies and are being wooed by international governments with subsidies, ease of doing business and other carrots to move their intellectual property (IP) to those countries,” said Harish H V, partner at advisory and consultancy firm Grant Thornton, on March 19, after SEBI chairman U.K. Sinha first expressed the regulatory body’s intent to make startup listing easier in the country.
“India will be a big loser if this IP drain continues just like our previous generation suffered due to the brain drain.”