Successful companies are reluctant to go public. Here's what they have to say

Twitter, Sabre Corp, King Digital, Potbelly, Starbucks, Sprouts Farmers Market — that’s just a sampling of the line-up of stocks that a US investor gets to choose from today.

Twitter is a household name, but the other companies are equally interesting. Sabre Corp is an airline ticketing technology provider that owns online travel agency Travelocity. King Digital is the owner of the ‘Candy Crush Saga’ that has you riveted to your smartphone. Potbelly makes toasted sandwiches. Sprouts Farmers Market is an organic grocery store chain and Starbucks the iconic coffee chain.

India certainly has equally popular consumer-driven enterprises — Café Coffee Day, Nirula’s, Micromax Mobiles, Himalaya Drugs — but sorry, you can’t buy their stock because none of them is listed on the bourses. In the US and China, e-commerce and social media companies have been the flavour of the season, with more than half a dozen such web-based ventures listed on the exchanges. But in India — one of the world’s most promising markets for e-commerce — these companies are hardly represented in the listed space. Flipkart, RedBus, Myntra and even MakeMyTrip, all remain out of the reach of the Indian retail investor.

But why do Indian enterprises prefer to hide their light under the bushel? Why don’t they like to tap the public for their capital by making an IPO (Initial Public Offer)? — the first company to sell bus tickets online in India — was recently acquired by the ibibo Group for a huge sum. Phanindra Sama, the company’s founder, told the media that doing this deal was more attractive than taking the IPO route. Even as it is alive and kicking in the US and even in China, the IPO market in India has completely dried up. In 2013, just three IPOs hit the market, raising ₹1,619 crore.

But this wasn’t because Indian entrepreneurs were asleep at the wheel. The private equity space saw a total of 400 deals valued at a mind-boggling $7,296 million (₹43,800 crore) the same year. That’s why we decided it was time to find out from the entrepreneurs themselves about why they shunned the stock market.

Who’ll woo institutions?

Nascent businesses hesitate to list on the Indian bourses because they fear that their IPOs may fail if institutional investors don’t show interest. Vishal Tulsyan, CEO, Motilal Oswal Private Equity Advisors, says, “Where offers are of a ₹100-150 crore size, not many big investors show interest and it becomes tough for the company to raise money from the capital market.”

IPO rules in India stipulate minimum net worth and profitability criteria, apart from a three-year dividend distribution record for companies seeking to make an IPO on the exchanges. For those that don’t make the cut, there is the book-building route. Companies which don’t meet the profit, dividend or net worth criteria, can set a price band and ask investors to bid for the shares on offer. Now, the securities market regulator, SEBI, requires book-built IPOs to reserve 60 per cent of the issue for institutional investors such as FIIs, mutual funds, insurance companies, and so on.

Therefore, the success of such IPOs depends mainly on whether institutions find the business attractive, unique and reasonably priced relative to firms already listed on the exchanges. Investment bankers say that this makes it quite difficult for small companies to get institutions to invest in them. With over 6,000 stocks already listed on the bourses, a tiny new debutant in the Indian markets faces a real challenge in proving that his business is different from the rest.

Private equity/venture capital funds, which expend more time in evaluating each investment and have much longer holding periods, have been more willing to fund smaller start-ups.

Too short term

Sometimes, it is the fear of the markets underestimating the company’s potential or jumping to hasty conclusions that putoff entrepreneurs. Take, for instance, e-commerce companies. Though these companies hold a lot of potential, there may not be many investors in India who want to bet on them because they aren’t profitable yet, say venture capitalists.

The CEO of a leading PE firm that is focussed on India, who didn’t want to be named, says, “A bet on Redbus or Flipkart is a bet on internet adoption and e-commerce growing bigger, but as things stand today a retail investor in India may not be willing to take this bet. If a company is incurring losses, how many retail investors will participate is a question mark. The risk-reward perception of an Indian investor is different.”

Take Twitter, which managed a blockbuster listing on the Nasdaq last year commanding a market capitalisation of $25 billion. Valued mainly for its large user base, the company turned in $665 million in revenues for 2013, but reported losses of $34 million. In fact, the company’s earnings numbers weren’t even put in public domain during the IPO.

India may not have a similar social media giant, but it has several e-commerce companies. Take MakeMyTrip which made a high profile listing in Nasdaq three years back. Why did it choose to tap US markets to list the business?

When this question was posed to Rajesh Magow, CEO, his reply was, “At that time there were not too many internet stocks that were listed in India. There was only Info Edge ( But the overseas exchange had multiple companies that were similar to us in the business. We thought that the investors and the analyst community in the US could understand and appreciate our business better.”

So, is the Indian market not ready yet? It is getting more receptive with Justdial making a very successful debut last year, but it may still take two-three years for the market to accept e-commerce players, say industry observers.

Demanding investors

Some companies are well-entrenched in their markets and sectors, but prefer to remain private — IndiGo in the aviation sector, Cavinkare and Himalaya Drug in FMCGs or Mankind Pharma may fit this slot.

As long as the firms are profitable and are able to find private investors to fund their long-term capital needs, they may be content to remain private.

Quite a few privately-held companies don’t want to be answerable to a large set of public investors, who may demand quick payoffs. Or comply with a whole lot of rules on disclosure and accountability that distract from their core business.

Rajesh Magow, CEO of MakeMyTrip, that listed after 10 years of operation, says, “When you are going through a build and growth stage, you would want to make sure that you are not necessarily distracted by (the pressures of) managing a public company. It is very difficult to manage public investors and public at large, compared to a couple of private equity (PE) investors”. Philipe Haydon, CEO of the Himalaya Drug Company — India’s leading herbal health and personal care FMCG maker — says, “Being privately-owned gives us the freedom to invest in research.

“For instance, our herbal drug for Hepatitis B, Liv.52 HB took over 14 years to develop. There were many false starts and disappointments along the way. But we believed that if we could develop this product, it would bring relief to many patients. Today, Liv.52 HB is the world’s first herbal drug for Hepatitis B”.

What he leaves unsaid is that if the company were listed, investors would demand quick results and its stock price would be beaten up every time a research effort disappointed.

Delays and red tape

Other entrepreneurs fear that, when they badly need funds, there is simply no time to go through the long-winded IPO process.

To make an IPO, one has to wait around for ‘good’ market conditions. Even if you find an auspicious time, you still need to compile the huge amounts of of information required for a prospectus: get SEBI’s go-ahead; haggle with investment bankers for their fee and get the pricing right. In short, an IPO is not a quick and easy way to raise money. Companies need to prepare 9-12 months in advance for a public issue, say investment bankers.

This is why entrepreneurs which are cash-strapped and need funds immediately go only to PE/VC investors. “New technology companies look for support from PE/VC investors in recruiting talent, strategy advice and facilitating strategic alliances,” says Siddhartha Das, General Partner of Ventureeast.

A PE investor with cross-industry experience may be willing to find other financiers, fine-tune the business model and guide the enterprise strategic and tactical decisions. Public investors do none of this, but demand similar results.

Are start-ups wary of IPOs because they fear regulations? The vehement answer was ‘no’.

Once listed, the regulator has a long list of dos and don’ts for companies to meet on the disclosure front.

From justifying the CEO’s salary to putting in place whistle-blower policies, to having independent directors on the board and giving regular updates on performance to the exchanges, the list of disclosure requirements in India is quite long.

But this does not deter promoters, say investment bankers. While most start-ups may not have processes in place initially, they need to anyway put their houses in order once they scale up in size.

For companies, the challenge is more from the time and effort involved in IPOs rather than meeting compliance standards, they add.

In fact, regulations in India are not all that tough. “I don’t see regulations in India as being tougher than in, say, the US or London.

“If a company wants to list in London, the senior management, including the CEO and CFO, will have to necessarily be based out of London, but in an Indian IT services company, the CFO could be sitting in the US,” says V Jayasankar, Head of Equity Capital Markets at Kotak Investment Banking.

Also read: Private Affair

Waiting for Mr Market

(This article was published on April 27, 2014)
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