Better times for start ups ahead

Wed, 1 Apr Pre-Open

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India hardly scores well when it comes to ease of doing business. And when we dream of growing big, we can hardly afford to ignore the huge opportunity that exists in tapping entrepreneurship talent. We need to have many more Infosys like stories to fuel India's growth engine.

Companies like Flipkart that have become a challenge for global behemoths like Amazon had very humble beginnings. And with the right kind of support, they now dominate the Indian ecommerce space. However, for one Flipkart story, there are countless cases of failures for the want of capital. In India, the conventional listing rules are tough, criteria with regards to listing rule lock in period is long and there is hardly enough listed rivals to arrive at a fair valuations. This to some extent is a disincentive for start ups and their advisers . One can hardly blame these companies for looking at investment abroad.

However, with SEBI's new initiative, all this may change. SEBI is now mulling over offering an alternative investment platform aiming towards start ups. For firms in the technology and ecommerce space, this could provide an opportunity to list in India. And hence may incentivize capital support from wealthy investors to the ones that have great business ideas and vision to execute them but lack capital support.

However, there is a reason behind tough rules for conventional listing. Relaxing these rules is likely to increase the risk quotient associated with start ups. Especially in these times when everyone wants to capitalize on hope and over optimism in the market. For e.g., for listing on new platform, the promoter (with a minimum of 20% stake) lock in period has been reduced to 6 months from 3 years, there disclosures are relatively easy and the criteria used could be other than profitability when it comes to deciding issue price. In order to discourage small investors from investing in these companies, SEBI has prescribed a minimum investment size of Rs 1 mn, while minimum trading lot has been set at Rs 5 m. This is likely to be mainly for institutional investors. While the new platform will be a great opportunity for start ups, we believe that the limits set for minimum investment will keep small investors at bay and prevent them from taking too much risk associated with such investments.