Listing venue for startups: Issues and way forward

India is seeing a boom in private investments in e-commerce and technology startups and a large number of funds have invested billions of US dollars in such online companies. Most of these private equity investors are expected to exit their portfolio companies through share listings, putting a spotlight on the sector and the potential candidates for an initial public offering (IPO).

Bankers expect them to explore overseas markets, mainly the Nasdaq exchange in the US, due to various regulatory requirements in India as well as the difficulty in finding valuation benchmarks on exchanges on which no comparable rivals trade. This has also motivated startups to externalize their business models to offshore jurisdictions, particularly Singapore.

Taking the above into consideration the Securities and Exchange Board of India (SEBI) floated a discussion paper on an “alternate capital raising platform” as a next step to address the lacunae. Some of the implications that would be required to be considered in this regard are discussed below.

Key considerations

Pre-tax operating profit: Regulation 26(1)(b) of the SEBI Issue of Capital and Disclosure Requirements) Regulations, 2009 (ICDR Regulations), prescribes that a company may float an IPO if it has a minimum average pre-tax operating profit of ₹150 million (US$2.3 million), calculated on a restated and consolidated basis, during the three most profitable years out of the immediately preceding five years. SEBI’s tight grip on profitability adds to the startup’s woes before getting a nod for its IPO.

Rajesh Begur is the managing partner of ARA LAW, a first-generation law firm with offices in Mumbai and Bengaluru.