Home / Companies / Start-ups /  Dual listing clause poses a hurdle for startup IPOs

The dual listing clause being considered as part of the new draft regulations for overseas listings may throw a spanner in the works for startups, such as Delhivery, Zomato, MobiKwik, PolicyBazaar, Ola and Grofers, which are gearing up for a public offer.

In the past week, several startups have gone back to the drawing board to study the clause, which aims to keep Indian entities under the control of the regulators.

Mint reported on 11 September that the dual listing clause, which is being opposed, will force homegrown companies to also list their shares in India even if they consider listing overseas.

Dual listing may result in higher taxation and compliance costs for startups. “Dual listing will actually neither help startups nor the regulator. The cost of compliance of going public is significant, and some companies may struggle to meet the needs of one listing. With this dual listing clause, the only option which companies have is to either list in India or use a ‘flip’ structure where they IPO through their international entities," said Santosh N., managing partner, D and P Advisory Services LLP.

Another big challenge for startups looking to go public is a Securities and Exchange Board of India (Sebi) clause expecting companies filing for an IPO to maintain a minimum average operating profit of 15 crore for three consecutive years. Startups with the parent holding entities in India will therefore find it tougher with the current listing guidelines because the companies planning to go public may not be profitable yet.

This week, Delhivery’s chief business officer Sandeep Barasia said while it was looking to go public by 2022, it will have to wait for Sebi’s final guidelines to finally choose the best market for an IPO.

Last week, Zomato said it will be going public by mid-2021. For an overseas listing, this would seem comfortable, but if it had to list in India, it would be a tight deadline. The foodtech unicorn did not respond to Mint’s queries.

Though Sebi allows even loss-making entities to go public under the Issue of Capital and Disclosure Requirements (ICDR) regulations, companies will have to allot 75% of their net public offer to Qualified Institutional Buyers (QIBs), including insurers, mutual funds and alternative investment funds.

This leaves only 25% of the net offer available to retail investors and high net worth individuals. This will result in lower liquidity for the startups from retail investors, besides affecting valuations by venture capital firms.

“The valuations by PEs and VCs is notional, and no one can actually back it. An IPO or strategic acquisition has always been the preferred exit route for traditional PE players. However, the debacle of WeWork and Uber IPOs has proved the fragility of valuation of these unicorns, and public markets may not offer the same valuation to these unicorns as earlier offered by SoftBank or Carlyle," said Aditya Jadhav, CFA and principal (investments), SIDBI Venture Capital Ltd.


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