Startups must be glad they have another pool of funds they can tap, now that the Securities and Exchange Board of India (Sebi) has said they may access the capital markets via an institutional trading platform. The good news is that Sebi isn’t insisting they all be technology-driven because that would have prevented a lot of promising ventures from reaching out to investors. However, why 25% of the pre-issue capital should be owned by qualified institutional buyers (QIBs) in the case of tech-driven startups, and why this should be a higher 50% for non-tech oriented startups is somewhat perplexing. Is it that technology-focused ventures are less risky? That aside, the listing process in itself should not be difficult since the capital markets regulator has left the conditions easier than those for companies that list on the main exchanges. The differential treatment is justified given many of the startups would not be profitable or even close to becoming so, but would nevertheless command high valuations.
If the country wants to encourage entrepreneurship and profit from it, startups must flourish otherwise, as the Sebi chief pointed out, they will only be looking overseas for funds. It would be interesting to see how many startups will actually want to go public given they would need to provide some minimum disclosures, even if these are less stringent than those for firms listed on the big bourses. Startups can be a cagey lot whereas investors are nosey, but they would need to be sophisticated and not be too demanding about targets and timelines. While there is, no doubt, a class of well-heeled investors—the Ratan Tatas and Narayana Murthys—who have the wherewithal to wait it out or even lose money, one is not sure how many there are.
Indeed, the minimum threshold for investments, specified by Sebi, of R10 lakh is actually not large at all in today’s context and given the companies themselves will be relatively small, it’s hard to see too many large institutional investors participating in these issues. So far, most of these businesses—such as Flipkart and Zomato—have been backed by private equity players, risk-takers who have made oodles of money in China and elsewhere are willing to bet big on India. Perhaps it’s the same PEs that will initially support the smaller startups too, in the process convincing high networth individuals to buy into them on the bourses. Indeed, while the requirement of least 200 allottees in a public offer sounds somewhat onerous, it may not be so. The startup landscape does look enticing with lots of good ideas that sound workable, and while one can’t help be reminded of the dot-com bubble, there would be those that are willing to wager a few lakhs.