Subir Roy: Have Indian bourses come of age?

VALUE FOR MONEY

Pramod Haque, the successful incubator of technology companies, told his Bangalore audience recently that as many as four companies in which his Norwest Venture Partners (he is a partner in it) has an interest are expected to go public during the current year. Then he dangled a bait. These four firms, all of which have a substantial Indian presence, are also examining listing in London or Mumbai.

Till a couple of years ago the choice would have been restricted to New York but meanwhile several changes have taken place. Haque himself is a personification of the India technology story. Any number of global technology ideas are being given shape in Indian development centres and a good number of them have behind them venture capitalists who are of Indian origin and ran into fame and riches during the technology upsurge that peaked in 2000.

Over the same period, post Enron collapse, the US regulatory system has put into place requirements mandated by the Sarbanes-Oxley Act. This has raised the regulatory compliance costs for US listed firms, making it that much more difficult for companies in the $70-80 million turnover range to go public and reward their initial backers. In mentioning alternatives to US listing, Haque referred to these new costs.

The third new development is the buoyancy in the Indian capital market. Behind the stock market boom lies an increasing Indian appetite for risk as well as the willingness of global risk capital to invest in the Indian market. While the Indian stock market mechanism has been reforming and modernising itself over the years, the recent rise in Indian stock valuations has narrowed the gap between Indian and US valuations. You still get a better valuation in the US but not that much better as earlier.

The key issue is: has a tipping point come where the new attractions of Indian listing and increasing confidence in Indian capital market regulation outweigh the hassles and additional costs of rule-bound, codified US regulation? Haque himself says the BSE should market itself better to attract cross-border firms. More than the BSE or the NSE going on global road shows, it is necessary to take a holistic look to determine how India can make itself a better host for innovation, of which being able to raise risk capital for technology ventures is a key component.

The continuing attractions of a US listing should not be underestimated. The depth and liquidity of the US market are huge, and US investors' willingness to invest in new technology unmatched. The classic example is the way in which risk capital has backed the biotechnology industry for decades and waited for adequate returns. In mature economies, where brick and mortar firms' earnings prospects have also matured, only new technology provides prospects for rapid growth. Still "mature" European firms are happy to meet onerous compliance requirements for the benefits of a US listing.

India's ability to attract listing by global companies is restricted uppermost by the absence of capital account convertibility. This hurts it most where a goal is within its reach ""turn itself into an regional financial hub. South Asian firms with an attractive story should be able to access the India capital market to raise resources for investment at "home". As things stand, only firms such as those backed by people like Haque, with a substantial India story (investment plans in India), can consider listing here.

Indian technology firms have typically followed a dual track listing policy, mostly listing first in India and then in the US. Wipro, Infosys and Satyam have followed this route and TCS has now listed in India. Among pure technology players, Biocon and Sasken have recently listed rather successfully in India. On the other hand, Siffy and Rediff have listed in the US first and the latter is reportedly close to an Indian listing. The last two show US or global investors' ability to sustain loss makers over longish periods. A leading CFO said: I will know that the Indian market has arrived when Sify and Rediff list in India. By that token, half an arrival may be round the corner.

Even more than capital account convertibility, which can be achieved by administrative fiat, what matters is the quality of Indian regulation. Sarbanes-Oxley may be costly and cumbersome but it has played a key role in restoring investor confidence, says Jaideep Ganguli, executive director, PricewaterhouseCoopers. And the best fruits of it are on the way.

After upfront investment in internal controls, governance structure and disclosure, rewards of transparency and better governance come over time. Quarterly and annual CEO and CFO declarations on the adequacy of internal systems and listing of deficiencies, and auditors' perusal of them and rectification make for decidedly better governance. What is more, clause 49 of Indian listing agreements, which has been recently given a new look, is an attempt to replicate Sarbanes-Oxley, sans penal provisions and scope for audit.

There is an all-round perception that Indian regulation can do better. Hassles involved in registration and compliance need to be reduced. Particularly "roving enquiries that never end" should be ended. There should be an active regulatory mechanism which takes decisions. As in so many other areas of Indian public life, there is no shortage of regulation but inadequacy in execution.

So, is Haque's proposition a pie in the sky? Not quite, says Mohandas Pai, CFO of Infosys. "We are moving in that direction. We are 25 per cent there, two years ago we were at 10 per cent," he assesses. The two numbers capture both the current optimism and the need to do a lot more.

sub@business-standard.com