Despite IPO rush, unicorns chase global direct listing for higher valuation

A successful listing by Zomato and a pipeline of IPOs by unicorns that plan to raise Rs 26,000 crore may look enough to persuade start-ups to list in India, but not really. Despite these successes, some in the industry believe that the players and investors in the Indian start-up ecosystem still lack understanding of their business models. Many believe that international stock markets can give them better valuations.

In March 2020, the Cabinet had approved foreign direct listing (without having to list in India). But detailed guidance has yet to come as there has been no clarity on the imposition of capital gain tax on such transactions, nor how they will be accounted for. 

This prompted some entrepreneurs and investors to write to the Prime Minister recently asking him to expedite the process of direct listing abroad.

Sources within the industry and the investor community believe that although the Indian markets have responded well to Zomato’s listing, foreign markets, especially, the US, have a deeper understanding. 

Bhaskar Majumdar, co-founder and managing partner, Unicorn India Ventures, believes that one of the biggest reasons for listing in the US market is the valuations that some start-ups can get, even if they are loss making. The high valuation in turn stems from the fact that the market understands the business.


 

Take the listing of UK food delivery company Deliveroo and US food delivery player DoorDash. Majumdar points out that both companies have similar business models. “Perhaps Deliveroo has better unit economics, but in terms of the listing performance DoorDash was much ahead of Deliveroo,” he said.

Deliveroo was listed on the London Stock Exchange this year and saw its value eroded by more than GBP 2 billion as it plunged by 30 per cent on its debut day. Meanwhile, DoorDash’s stock price was up almost 80 per cent of its IPO price on its listing.

Majumdar observes that Zomato is so far the only successful listing in India and it’s still early days. It is already having challenges in terms of analyst and brokerage houses that can understand its business. “From an exit point, India is still a difficult market for investors,” said Majumdar.

INVESTORS FIRST

• Some of the regulatory changes in recent years
• Framework for issuing DVR shares approved
• Main board listing norms eased
• Start-ups can choose QIB route
• Post-IPO lock-in period for promoters halved to 18 months
• IPO disclosure requirements eased
• More legroom for AIFs to invest in unlisted firms

Salman Waris, managing partner at technology law firm TechLegis Advocates and Solicitors, explains that direct listing is when companies offer their equities directly to the general public through stock exchanges without taking the route of IPOs, i.e., there is no involvement of underwriters, banks, or financial institutions for the direct listing. This way, it turns out to be very economical as there is a saving of huge overhead expenses in the form of fees and commissions.

“Direct listing is a liquidity event that does not fill the company’s coffers with cash. Shares are not allocated at a pre-established price. It does not have a lock-up period because it is based on shareholders selling their holdings. Only outstanding shares held by existing investors, promoters and any employees can be sold directly to the public,” said Waris.

In short, he added, a direct listing allows the transfer of ownership from the company’s private investors to public investors, without raising new capital. “It is for sheer economic reasons that direct listing is being pushed for by a certain section in the Indian industry,” said Waris.

Industry sources also point out that direct listing does not mean that companies are taking capital outside; sometimes the aspiration of being a global player also makes a foreign listing attractive.

“There are several Software as a Service (SaaS) players. Like the IT services players, their majority markets are the US and Europe but their business model is not like IT services players and hence they want this option of listing overseas. Also, there are not enough analysts who can understand this asset class,” said a start-up founder on condition of anonymity.

Many also feel that for investors the overseas market is better for listing as the taxation norms are simpler. Yet the fact remains that the Indian regulatory body and the government have made several changes in the past few years to make sure that Indian markets also become a viable exit route for investors.

Indiatech.org, an industry body representing start-up founders of and investors, has been persistently working with SEBI and NITI Aayog for three years to try to make it easier for start-ups and unicorns in the internet space to list within India.

Indiatech.org CEO Rameesh Kailasam said: “When we started work on this in 2018, our target was that by 2021 India should witness blockbuster IPOs from at least three internet-based companies. A kick start to this effect has already been witnessed with recent IPOs and others in the pipeline. We continue to have further discussions with the sole objective of wealth creation in India by easing listing norms further, similar to what their counterparts enjoy in other geographies overseas,” said Kailasam.

At present, Indian laws permit listing on international bourses through indirect listing of equity shares through the American Depository Receipt/Global Depository receipts (ADR/GDR).

The other way of listing is by creating a holding structure where the company can be incorporated in Singapore or any other country and the Indian unit becomes a subsidiary.