A Launchpad For Startups

The securities and Exchange Board of India (Sebi) has come up a skeletal guideline for listing startups on the bourses. Now Indian entrepreneurs need not go too far to startup friendly shores of Hong Kong, London or New York; they can just raise funds in Mumbai. But would it be wise to invest in startups? Think about it. This week, Elon Musk’s SpaceX’s rocket failed to launch for a third time. The company has been funded for 13 years with no revenues in sight. There is high risk in “listing” ideas. That said, without start-ups there are no ideas.

With that in mind and future potential of such ideas, Sebi has proposed an institutional trading platform with a fixed minimum investment for retail investors at Rs 10 lakh. The move facilitates participation of only family offices and high net worth investors. It denies the common man from betting on companies with no future financial projections. Sources in Sebi say that the platform serves dual purpose; one to raise capital, and two, to help in keeping the intellectual property within the country. This allows institutions that buy into these stocks to sell startups to large enterprises in the long run, for a high valuation.

And if start-ups manage to make revenues, they have the option of listing on the main index, Sensex, in the long run.

But there are some concerns too. The reduced lock-in period of six months, as against three years, can create a bubble with unscrupulous investors trying to make quick bucks by listing startups on the exchange. Startups, more often are known to fail. Remember, the dotcom bubble of 2001. The standard valuation parameters such as price to earnings or earnings per share do not apply to startups.

There are 3,100 registered Indian startups, but only 5 per cent have raised money so far. Around $7.2 billion has come into the country in the form of venture capital (VC) and private equity funding since 2013. But with the trading platform in place, money can now flow into start-up ideas that could never raise money before, as investors have the option of exiting the investee companies through the platform. However, for this to take off, the consensus of the tax department and the Reserve Bank of India RBI) is needed. Currently, startups register outside India because tax on short-term capital gains, for their investors, is less than 10 per cent. In India, it is 30 per cent. Again, the free flow of foreign money and currency exchange is regulated by the RBI. A single VC investment cycle typically lasts 3-5 years after which investors exit by way of trade sale, public listing, recapitalisation and secondary sale. Still, it is great to see startups finally getting their own launchpad.

— Paramita Chatterjee & Vishal Krishna

(This story was published in BW | Businessworld Issue Dated 27-07-2015)