The Indian start up scenario, with 3000 of them presently, is expanding at a pace that was never quite envisaged a decade earlier. Moreover, it is comparatively a more recent trend, less than 5 years old or thereabouts. Cumulatively, they impact millions of other small businesses and are considered to be the hotbed of innovation in the new-age economy. Rightly so. Cash-strapped as they are they are, and in quick need of funds, the traditional route of listing in the SME Exchange through IPOs is cumbersome and an expensive proposition. Future prospects notwithstanding, it cannot be wished away that they will all succeed.
Actually, in reality it is quite the reverse, where risk of failure looms large over these ventures. Imperative, as it is to create an eco-system which fosters the spirit of free enterprise, it must also be borne in mind that investors must fall under the category of being “informed.” As per SEBI’s approval, in 2013, such companies are permitted to list in Institutional Trading Platform (ITP) without having to make an IPO. They are permitted to raise equity through private placements, but not through public issues. Despite these, lock-in periods, minimum percentage of post issue capital to be held by promoters, detailed disclosure on objects of the issue and basis for issue price to protect the interest of investors, can at times work at cross purposes. These regulations have proven to be not-so-friendly from a fund raising standpoint. Also these companies are not always profitable in the initial years and go on to make money much later. A phenomenon quite distinct from large profit-making companies.
The other option is to raise money overseas. During the early nineties, in the wake of liberalization, American / Global Depository (ADRs / GDRs) were routes leveraged by Indian public companies to raise foreign capital. As progressively FDI norms got eased out, eventually in 2005, through an amendment to the scheme, the Ministry of Finance disallowed unlisted Indian companies from accessing international capital markets unless they were already listed in India or were undertaking to list in India in parallel with also listing overseas. This move was intended to maintain regulatory control on these Indian companies and help develop alongside the domestic capital markets. Notwithstanding, this has not had a favourable impact on the capital markets, which prompted Ministry of Finance to re-consider its decision.
Around the same time (2013), Ministry of Finance, with a view to liberalise funding, allowed unlisted companies that are incorporated in India to directly list in overseas markets without prior, simultaneous or subsequent listing in Indian bourses. The countries where listing was allowed were complaint with IOSCO / FATF or those which have a bilateral agreement with SEBI. Though this scheme was implemented on a pilot basis, it has provided succor thus far to businesses which have unique models (especially those in high-end technology, internet, bio-tech etc). Notably, It has found favour with seasoned overseas investors who understand these models, as opposed to risk-averse investors in India. After two years and the expiry of this window shortly, it is now up for review. In addition, the funds raised abroad can also be used in India. Companies which exhibit consistent track record of good performance for three years can take this route based on approval by the Department of Economic Affairs, which pleasantly enough, has not been tight-fisted in its definition of what constitutes a measure of good performance. Although, it is on a pilot basis, there are conditions which have to be strictly adhered to. Under no circumstances can it be in contravention to Prevention of Money Laundering Act or the prevailing FDI policy.
NASSCOM, in consultation with its members, has been working closely on this and would like to see its extension which would clearly signal a positive intent. The SEBI paper on alternate capital raising platform for SMEs is in continuation of the Budget announcement made by P Chidambaram in 2013 – a highlighted portion is noteworthy:
“One of the challenges in coming out with a special carve out in these knowledge based industries is to define them. It is proposed that the new platform for raising money within the country will be initially made applicable to companies which are in the area of software product development, ecommerce, new-age companies having innovative business model, etc. which create new business opportunities or which serve important efficiency enhancement in existing business activities.”