Sebi recently initiated another consultation that seeks to relax the rules on start-up listings on the institutional trading platform (ITP), one year after the regulator set the ball rolling. The platform is a venue for unprofitable firms and technology start-ups to list without taking the IPO route on India’s two main stock exchanges.
The measures do show that Sebi has put a lot of thought into the proposal. These include expanding the pool of potential issuers and investors, requiring market making for small deals, raising the cap on individual shareholdings and giving controlling shareholders the ability to remain in control.
But the effort continues to be hobbled by a whole host of issues and few market participants expect the ITP to take off. It’s saying something that, after so long, the regulator is still struggling to get it right.
The problem may well be that the very premise of the ITP is flawed. That’s because Indian start-ups which require funding are already well served by a functioning private equity market. Few of those investors need, or indeed want, their early stage companies, many of which have yet to turn a profit, to be listed.
Besides investors, issuers too have refrained from taking the plunge on the ITP. They have few reasons to, what with the level of compliance being roughly similar to the requirements for a company listing on the main market. It doesn’t help that there is little promise of migrating from the ITP to the main boards.
If eventually there are listings, liquidity is expected to be squeezed given the size of these companies and because the ITP is only accessible to institutional and high net worth investors, but off-limits to retail.
Moreover, a stock that only trades a few shares a day is of little use to investors, since such marginal trading cannot be used as a yardstick for fair value, and negates the point of listing in the first place.
Sebi could also have been less ambiguous about certain contentious issues. The old rules dictated that just like a regular IPO, ITP listings must be allocated to a minimum of 200 investors. But this is a challenge even for large IPOs, and considering that ITP listings are solely an institutional play, it is virtually impossible for start-ups. The new consultation, however, is silent on this.
It’s not just investors and issuers which have evaded the ITP. Banks too have made themselves scarce for fear of the meagre fees on offer, with transactions only expected to pay in the range of $1m-$2m.
The lack of take up from all sides should be proof enough that no matter how many revisions Sebi makes, the ITP just isn’t happening. There might be a model for Indian start-up listings that actually works, but the ITP, at least in its current form, is not it.