Primary listings abroad could help Indian start-ups get better valuations
The proposed move by the Modi government to allow Indian companies to list abroad without having to mandatorily go for a secondary listing in India will help Indian start-ups and conglomerates raise large amounts of foreign money at higher valuations.
Indian companies can directly list abroad without having to go in for a secondary listing on domestic stock exchanges, Reuters reported recently, quoting unnamed government officials and industry sources. The Ministry of Finance and the Ministry of Corporate Affairs are in the process of finalising the rules for the same. Indian Finance Minister Nirmala Sitharaman had first announced that such a move was under consideration at her press conference on May 18.
Two views within the government
But since then, several media reports quoting unnamed officials said influential sections within the government wanted a mandatory domestic secondary listing for Indian companies listing abroad so as to broaden and deepen the Indian markets and give Indian investors the opportunity to benefit from the resultant value creation.
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The Ministry of Finance and the Ministry of Corporate Affairs are in the process of finalising the rules for primary listings on foreign bourses by Indian companies.
They even mentioned the time period beings discussed - these companies would have to list on an Indian stock exchange within six months to three years of their primary listing abroad, the sources had said.
This caused concern in corporate and investor circles that feared that such domestic listings would be value-destructive and reduce the lustre of Indian companies listing abroad.
Fear that Indian growth prospects would be impaired
The hesitancy in Indian official circles is born of the fear that the new rules would result in many Indian companies choosing to list abroad only in order to get higher valuations. This, they feared, would hit the growth prospects of India's capital markets.
The statistics in this regard are very telling. On October 16, the market capitalisation of all companies listed on in India $2.15 trillion, i.e., about 33 per cent less than the country's GDP - well below investment guru Warren Buffet's benchmark of market cap equals GDP. The corresponding figure for the US was $21 trillion, about the same as the US GDP.
Then, companies from across the world raised as much as $23.6 billion on the New York Stock Exchange and Nasdaq in the first half of the current calendar year; the corresponding figure for the BSE was $2.3 billion.
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Current rules are very restrictive
Under rules currently in force, Indian companies are allowed to issue only some types of securities, such as depository receipts on foreign stock exchanges - and that too only after they list in India. Many consider this condition to be too restrictive.
One of the most popular means of raising capital abroad is in the form of American Depository Receipts (ADRs). Infosys and ICICI Bank have used this route to enter foreign stock markets.
Mandatory secondary listing in India is risky
Companies such as Reliance, which could list its tech arm Jio Platforms abroad, Indian unicorn Paytm, Softbank, a major investor in the Indian technology and start-up sector and several other large investors have, since, impressed upon the government that mandating a secondary domestic listing would impact valuations and raise compliance risks and costs and these could put the companies' future growth prospects at risk.
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The net result, they said, would be to negate the very purpose of such foreign listings. "To require companies to subsequently list in India will make these rules meaningless," an Indian media report quoted a senior executive of an internally reputed venture-capital firm as saying.
Indian unicorns could be main beneficiaries
India has more than 30 unicorns (start-ups with valuations of more than $1 billion). These could be the main beneficiaries of this decision by the Modi government. Ride hailing app Ola, edutech giant Byju's, payment solutions company Paytm, India's Airbnb clone OYO and several other such companies will gain once the new rules become the law of the land.
This will allow foreign investors like Softbank, PE form KKR and several other deep pocketed foreign investors in privately held Indian start-ups a profitable exit route.
Other potential gainers could be the Reliance Jio Platforms, the unlisted but valuable subsidiaries of other large business houses as well as a few holding companies of diversified conglomerates.
Valuing loss-making start-ups
Markets in the US, the UK, other European countries, South Korea, Singapore and Japan have more experience and expertise in valuing such companies - such as loss-making but otherwise red-hot start-ups and conglomerates, which, typically trade at a discount to their underlying value - and so, listing in one of those markets could give early stage and other foreign investors a profitable exit route, because of the higher valuations their investments can be expected to command.
“Direct listing overseas without the need to list in India is a massive benefit for start-ups, companies in high-tech and biotech, metals and minerals, etc. which are better understood by investors in specific markets overseas,” Grant Thornton India CEO Vishesh C Chandiok told leading Indian financial daily Financial Express a few months ago.