Retarding offshore listings requires fertile domestic markets, not regulatory fatwas or appeals to patriotism
The year 2014 was a good year for initial public offering (IPO) markets globally; companies raised about $95 billion in the US, $27 billion in the UK and $24 billion in Asia. The US continues to lead and grow; the amount raised grew by more than 50% over the previous year and technology accounted for 40% of overall fund raising (albeit hugely helped by the $25 billion Alibaba fund raise). But the India story is painful; the $200 million raised from six main board IPOs in 2014 was the lowest level since the $48 million raised in 2001 and a fraction of the $6 billion peak in 2010. According to Prime Database almost 103 companies since January 2009 who got approval to raise $7.7 billion allowed the approval to lapse. Interestingly qualified institutional placements (QIPs) jumped 300% in 2014; 33 QIPs raised $5 billion from investors. QIP volume is nice but is India well served by 84% of the equity amount raised in 2014 being for companies already listed?
We’d like to make the case that there is a growing narrative among high growth companies backed by institutional capital that it is better to bypass India’s IPO market and list overseas. A vibrant IPO market is a strategic national asset—it allows smart people to challenge incumbents—and it must be an important policy priority to encourage Indian companies to list in India and protect the reality that China has more than 500 companies listed in the US and 9 out of 10 large Hong Kong listings headed to the US but 99% of Indian companies are listed on an Indian stock exchange. We have already offshored much of our currency, equity index, and debt markets but have a chance to stop the offshoring of our IPO markets. Before we look at solutions let’s look at the case made by investment bankers for a US listing:
Regulatory regime: The US regime is a disclosure based regulatory regime so there will be no valuation fiddling or non-written rules. It a regime built for institutional investors, so protection of retail investors does not overwhelm rationality. And the recent Jobs Act has deferred and diluted the massive costs of Sarbanes Oxley for smaller and international companies.
Investor base: A US listing gives you access to investors willing to pay for high growth even though earnings are in the future. For example, Amazon and Salesforce have never made a profit but trade at high valuations. The ability to choose your investors at an IPO is attractive for companies and entrepreneurs.
Global cachet: A US listing creates signalling value that is an unfair advantage in the market for customers and talent. It also signals governance that allows you to attract long-term investors. In other words it is a unique branding event for a company that wants to operate globally.
Global currency: A US listing creates substantial strategic flexibility to acquire companies for stock, sell to a strategic investor who may desire to delist, access offshore debt markets, and offers a predictable tax regime.
But the case for a domestic listing is getting stronger. The recent change allowing 60% of an IPO for anchor investors allows companies to choose the institutional shareholders they want. The ease-of-doing business thought world in Delhi should ease some regulatory cholesterol. Some sectors such as pharmaceuticals and banking trade at higher multiples than global markets. And companies focused domestically with rupee revenues have a currency mismatch that can distort reported performance.
A vibrant IPO market is a national asset. This is already threatened by the pipeline; 54% of technology companies that raised a Series A institutional venture capital round incorporated offshore according to Ispirit. But retarding offshore listings does not lie in issuing regulatory fatwas or appealing to patriotism but in making our capital markets a fertile habitat. This needs many moving to a limited regulatory view on IPO valuations or riskiness of business strategy but a strong pre-IPO and post-listing disclosure regime. Moving away from an IPO market designed for retail investors but encouraging the growth of domestic institutional capital pooling. Turning around draft documents in a time bound manner and clustering comments around requiring disclosure. And not having unsaid regulations or norms but make everything explicit so people don’t dance with ghosts.
Poet Maya Angelou once said that the Universe is not made of atoms but stories. Narratives and role models drive behaviour; the early information technology (IT) service entrepreneurs in Bengaluru have created a Cambrian explosion of next generation Web companies, but regulatory arbitrage role models in liquor, collective investment schemes, etc, mean that Uttar Pradesh is an economic wasteland. India is entering a positive spiral for job creation driven by entrepreneurs who do not have connections but have courage in their hearts, the sweat on their brows and the strength of their backbones. While broader economic reform is the wind at their back, we must recognize that the genius of the US capital markets is that they rapidly create new elites and destroy goofy old ones. A vibrant and well regulated Indian IPO market can—and must—do the same.
Anup Bagchi and Manish Sabharwal are, respectively, managing director of ICICI Securities and chairman of Teamlease Services.