BackSmall firms, start-ups can list without IPOs
The decision is expected bring relief to PE, VC funds that have been looking for easier exit options
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Mumbai: Small firms and start-ups will be able to raise public money and trade their shares on exchanges without an initial public offering (IPO), India’s capital market regulator said on Thursday, a move that will help these companies and bring relief to private equity (PE) and venture capital (VC) funds that typically fund such firms and have been looking for easier exit options.
Analysts and experts welcomed the move but said the special platform on which this was being allowed was unlikely to be liquid enough to really benefit anyone, apart from so-called seed and angel investors that invest small amounts in a new enterprise.
Investors say any exit option in India is welcome because it is usually difficult to attain, with the IPO window or the mergers and acquisitions (M&As) route not usually being available to small and new companies.
Since 2000, PE firms have invested $85 billion in India, and nearly 65% of the transactions are yet to offer returns, according to the India Private Equity Report 2013 by Bain and Co., a consultancy. So far, the funds have received $30 billion of returns from the $85 billion in investments.
“It’s a positive if there is any opportunity to exit. Exits are always welcome, but I wouldn’t encourage too many companies to list because liquidity can become an issue," said Sasha Mirchandani, managing partner at Kae Capital, an early-stage investment fund.
Bringing in a new set of norms first mentioned in this year’s budget, the Securities and Exchange Board of India (Sebi) allowed small and medium enterprises (SMEs) and start-up companies to list and trade their shares on a special platform that is to be called the Institutional Trading Platform (ITP) in SME exchanges.
On 8 October, the regulator amended public issue norms to enable SMEs list without an IPO, but the details of the new rules were put out on Thursday.
Investors say that while the ITP platform will offer exit routes to early-stage investors, it will not open a floodgate of start-ups and SMEs looking to list.
“In the first year, not more than 10 companies will list on the ITP," said Mahendra Swarup, managing director, Avigo Capital Partners, and president, Indian Private Equity and Venture Capital Association, an industry body. “It’s a good liquidity event for small seed investors and angels, but not for SME investors, VCs and PEs," Swarup said, explaining that large exits will be difficult.
Swarup is correct to say this. Exiting stock blocks of $15-20 million is difficult even on bourses such as the National Stock Exchange and BSE, and if a SME or late-stage VC investor tries to exit in such proportions, it could cause the company’s stock to tank.
It is hard to analyse SME businesses based on public information, according to Mukul Gulati, managing director, Zephyr Peacock India, a global PE firm focused on SMEs. To really understand the business model, plans and new initiatives, one needs access to the management, “which is not possible always in a public environment", he said.
Nor will the platform being provided have “enough liquidity for institutional investors to exit", said Gulati.
Early-stage investors say the biggest advantage of listing on the ITP is that an investor can avail the benefit of not having to pay capital gains tax on a transaction. Short-term gains on transactions on a non-market platform attract such levies of as much as 20%.
“It’s a good initiative to list companies," said Anil Joshi, president, Mumbai Angels, an angel network. “When one gets listed on the ITP, it will put some corporate governance in place, which will make secondary sales easier."
To be sure, listing on the ITP will be widely different from conventional listing on the main board of stock exchanges, and the SMEs opting to list and trade shares will be bound by certain limitations, though the route will offer more flexibility.
According to Sebi, only companies that are younger than 10 years and whose revenues haven’t exceeded ₹ 100 crore in any year can list on the ITP. The paid-up capital of such SMEs and start-up firms must be below ₹ 25 crore.
The ITP will also differ from usual share-trading platforms. It will be accessible only to a certain set of individuals and institutions that can trade in a minimum lot of ₹ 10 lakh.
Further, only those SMEs and early-stage companies that have received investments of at least ₹ 50 lakh from an alternative investment fund, VC fund, an angel investor or similar investors can list on the ITP.
Small firms that have received money from a scheduled bank for their project financing or working capital needs can also opt for listing on the ITP after three years of such financing and full utilization of such funds.
The SMEs being listed on the ITP may raise capital through private placement or rights issues.
Companies listed on the ITP can exit the platform and choose to be listed on any of the main bourses only after receiving approval to do so from at least 90% of their shareholders.
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