Home / Opinion / Views /  Analysis: Sebi just gave Indian startups wings

The Securities and Exchange Board of India’s much-awaited move to ease the listing norms for India’s rapidly mushrooming startup enterprises is aimed at widening the primary markets and giving small investors a chance to participate in the growth of a business segment that barely existed 20 years ago. A number of Indian startups have now reached the stage of their evolution wherein a primary market listing is the logical next step, in part to give early-stage investors an opportunity to cash out, but also to take their story to a wider audience.

It may not be all hunky-dory though, for a listing will serve as a test of these firms’ success based on parameters that are far more stringent and demanding than what they have been used to so far. Angel investors, private equity funds and venture capitalists tend to be far more benevolent towards their wards. That’s because, at the early stage of their investees, they seek growth, not returns. What’s more, the kind of numbers they look at can only come from exponential progression. This is why we have seen terms like gross value added (GVA) used as a measure of growth for digital commerce. Unfortunately, profitability hasn’t yet figured in the ecosystem of most startups.

Antiquated as it seems, that is the yardstick a listing would bring into play, since the regular investor wants to see her money being put to generate profits, and that too in the short term. It is the reason why seasoned business leaders with years of experience still dread the brutal scrutiny of quarterly and annual results.

By creating a separate boardwalk, ambitiously called Innovators Growth Platform, on the National Stock Exchange, Sebi has sought to give some distinction to these new kinds of IPOs. Some of the other concessions like liberalizing the open offer trigger requirements as well as tweaking the delisting norms, are also intended to make life easier for startups.

But eventually, India’s newest listed companies will have to play by the rules that govern all businesses. It won’t be easy. Market researcher Renaissance Capital estimated that 50% of IPO registrations in the US were eventually withdrawn. Even among those that listed, there was disappointment in store for investors. Cybersecurity company McAfee, for instance, had solid credentials going into its 2020 listing. Priced at $20 per share, it dropped on its opening day and is barely up six months later.

For inspiration, though, startups need only look at the Infosys IPO in February 1993. Its success kickstarted a $200 billion industry with companies that are today the role models of how to grow profitably.

(Sundeep Khanna is the author of Azim Premji: The Man Beyond the Billions)

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