Will Sebi's new trading platform, listing norms further inflate startup valuation bubble?

The Securities and Exchange Board of India on Tuesday simplified the norms governing the initial public offering of companies in a bid to encourage internet start-ups to raise funds domestically rather than going abroad.

In order to facilitate fund raising by these start-ups, the market watchdog has approved a new platform called Institutional Trading Platform (ITP) where they can get listed and also relaxed listing norms.

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Ibnlive image

According to the press release, "companies which are intensive in their use of technology, information technology, intellectual property, data analytics, bio-technology, nano-technology to provide products, services or business platforms with substantial value addition and with at least 25% of the pre-issue capital being held by QIBs" will have access to this platform. Any other company in which at least 50% of the pre-issue capital is held by QIBs can also raise funds from ITP.

Apart from this, the Sebi has also cut listing time for companies from 12 days from date of IPO to 6 days and expanded the ASBA facility for IPO investments that would do away with cheque payments.

ASBA or Application Supported by Blocked Amount is a facility introduced by Sebi, where the amount of an investor held in an account and not debited until she is alloted the shares.

The business community is hailing the Sebi move, coming at a time when the country has a huge startup base looking for funding support. According to Nasscom estimates in 2014, India has more than 3000 startups and is the thrid largest base in the world.

Former Infosys executive Mohandas Pai also welcomed the move saying, A great move. Congrats SEBI.

Sudhir Sethi of iSPIRT List In India has told Mint newspaper that the new listing norms address the one big issue Indian startups face - funding. According to him, with exit options available, investors will not be hesitant to fund Indian startups.

According to Reuters data, about 3,100 Indian startups have raised $7.2 billion in venture capital and private equity funding since 2013 and most of it has gone to technology companies.

E-retailer Snapdeal is enthused at the new listing norms. "Sebi's proposed plans to implement e-IPO and start-up specific listings platform is a welcome move that will provide much needed access to funds for start-ups," a PTI report said citing a company spokesperson's statement.

"For us at Snapdeal, we are particularly pleased with this move considering that easing of listings norms will benefit India focused companies like ours in the long run," it said.

The simplified framework for capital raising is clearly a big hit among the startups. However, here is a question that begs an answer: how exactly will these norms impact the valuation of these companies, which are percieved to be already in the stratosphere?

Remember, many have expressed reservation about these valuations. In March, Chinese e-commerce giant Alibaba backed off from stake buy negotiations with Snapdeal presumably due to the high valuations.

According to media reports, Alibaba was valuing Snapdeal in the range of $4-5 billion while the Indian company sought a value of $6-7 billion.

More recently, Ratan Tata, the Tata Sons Chairman Emeritus who has invested in about nine startups in his personal capacity, also raised the issue.

"It's true that the valuations (of e-commerce) are very high and valuation seems to be driving these companies more than traditional matrix of evaluation," Tata said at the 107th Annual General Meeting of Indian Merchants' Chamber.

He, however, was not critical of this as he added that the current trend is similar to what has happened elsewhere in other sectors.

"We have to give these young entrepreneurs a chance to prove themselves... shoulder to shoulder... with traditional business," Tata was quoted as saying in a PTI report.

Sebi's new norms have also given a huge leeway to startups on the valuation front.

"As the standard valuation parameters such as P/E, EPS, etc. may not be relevant in case of many of such companies, the basis of issue price may include other disclosures, except projections, as deemed fit by the issuers," Sebi said in its press release.

This will be manna for the startups because Sebi's line of thinking is perfectly in sync with what startups want.

As a recent report in The Economic Times had rightly pointed out many of these companies "junking conventional accounting norms to talk up valuations".

"Many terms are unconventional but startups use them in PR and public communication to highlight growth. These metrics signal these companies are in a hyper-growth phase," Rutvik Doshi, director at Inventus Capital Partners, has been quoted as saying in the report.

An example of this metric is GMV or gross merchandise value, which is the total value of goods sold on a site. The catch here is that it does not represent the actual revenue of the company.

The report points out that investors are well aware of this.

"If these companies are using forward numbers or GMV to pump up their valuations, it is only because their investors are willing participants in the process," Aswath Damodaran, professor of finance at the Stern School of Business, New York, has been quoted as saying in the report.

Viewed in this context, there is reason to believe that Sebi's lax norms on valuation and disclosure are likely to further inflate the already existing bubble in the Indian startups.

(Editor's note: The last line of the story has been corrected after a reader comment that pointed out a mistake.)


Updated Date: Jun 24, 2015 16:50 PM

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