Starting trouble

India is in the midst of a startup boom. Not a day seems to pass without an announcement of a new startup, mostly online, serving an eclectic mix of goods ranging from packaged idlis to packed furniture.

Angel investors and PE funds — who always had the money but never wanted to part with it — have suddenly opened their doors to these firms.

Budget 2015 added to the excitement by setting up a mechanism, SETU (Self- Employment and Talent Utilisation) in NITI — a techno-financial, incubation and facilitation programme with a corpus of ₹1,000 crore — to support startup businesses and other self-employment activities, particularly in technology-driven areas.

Not to be outdone, market regulator SEBI liberalised listing norms for startups on an alternative trading platform. Only two types of investors — qualified institutional buyers (QIB) and non-institutional investors (NII) — can invest in shares of startups that opt for listing.

The definition of QIBs would be widened to include systematically important non-banking financial companies and family offices/trusts that register themselves as alternative investment funds. SEBI proposes that any other investing entity registered with it with a minimum net worth of ₹500 crore may also be considered as a QIB for investing in startups.

QIBs will be entitled for at least 75 per cent of the startup shares; the balance will be held by NIIs and no QIB can be allotted more than 5 per cent of the issue size.

The minimum application size in case of such issues will be ₹10 lakh. Retail investors will not be allowed to invest in such issues initially due to the risk involved.

To get listed on the proposed platform, a startup will be required to allot shares to at least 500 investors while launching the issue. SEBI proposes that the startup will need to remain listed on the institutional platform for at least a year before migrating to the main board of the stock exchange.

After listing, the minimum trading lot in shares of such startups on the institutional platform has to be ₹5 lakh.

Unlike in conventional IPOs, where promoters are subjected to a lock-in period of three years for a minimum of 20 per cent of the post-issue capital, shareholders in startups will have a lock-in period of six months.

Ironically, even as SEBI invites comments for its discussion paper, one of the marquee companies that it was aiming at to list in India — Flipkart — announced that it intends listing on the Nasdaq sooner rather than later. Startups prefer listing abroad because of the better valuation offered there.

Sentiment and FII billions play a big role in how Indian stock markets behave.

Hence, unlike the Nasdaq, Indian bourses would not give a premium valuation to a new-age company that has an enviable top line but a bottom line that is in red. While the move to protect retail investors from risky investments is welcome, most retail investors know that stock markets are great levellers.

In this context, the government needs to implement SETU and the fund for start-ups announced in the July 2014 Budget at the earliest. The SEBI announcement provides an exit option for existing investments of angels and PE funds. SEBI should keep tweaking its policy based on the experiences of companies that list on its new platform. Investments in startups can well be the new definition of risks.

The government and SEBI should ensure that their policies minimise, and not magnify, the risks of startup investments.

The writer is a chartered accountant

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