The listing dilemma

When deciding between listing in India and the US, founders should prioritise long-term considerations over listing price

In the past few weeks, I have been asked by many private companies about where they should list? In India or the US? Given the frequency of these discussions, it is clear that we are going to see a stream of new listings from the venture capital/private equity ecosystem. This move towards listings is driven by the robustness of markets in both India and the US, the pressure from fund limited partners for distributions, and the fact that many companies are left with only 9-12 months of cash runway.

The dilemma is clear: International investment banks want a global listing as it showcases their strengths; venture capital firms are trying to maximise the initial listing price; and many of these private companies are domiciled overseas, so tax consequences of a local-listing are not trivial. Therefore, listing is an important decision, impacting long-term value creation. How should one think about it?

A simple framework is that by listing overseas, you eliminate the domestic investor base and many emerging market (EM) investors. If you list locally, you will exclude many global investors, who are not set up to trade local equities. Which investor base is more core and important to you and can appreciate your type of business? Both pools of capital are sufficient to support any listing. Another consideration is the ability of different listing jurisdictions to value different types of businesses. Is it true that US markets are more appreciative of high-growth unprofitable businesses?

I often hear that Indian public markets would have never funded a disruptor like Netflix or Tesla, years of losses and negative cash flows. However, are you such a disruptor?

To me, if your business is very local, either in terms of the customer base or regulatory environment, then the choice is clear. You must list in India. If the potential investor has to have an understanding of India and the local business environment to truly understand your business and its potential, it is best to list at home.

Take the example of a local e-commerce business or an India-based fintech. To truly appreciate and value these businesses, you have to understand local nuances regarding competition and regulations. It is unlikely that global investors will take the time and effort to be able to fully appreciate this type of business. For most global investors, India remains a rounding error, with current global holdings of Indian equities at a 10-year low, sitting at the second percentile of its own history.

At best, they own three or four stocks in India. They will not put in the effort to understand India and the local nuances just for one stock. It is an off-benchmark bet. The people who will put in the work are domestic and EM investors, who can only access domestic listings. For EM investors, India has never been more relevant, now the second-largest weight in the MSCI EM index. Getting India right is a make-or-break decision for the EM fund manager, and the domestic investor has nowhere else to go, unlike a global investor. Who will spend more time with that type of incentive structure?

You will get many momentum/ thematic investors but it is unlikely that you will get as many investors taking a five-year view if you list overseas.

When thinking about truly international businesses, like SaaS (software as a service), who sell globally, the criteria differ as there is no India-specific knowledge required. The global funds have seen many such business models. You may also get a better initial valuation overseas as there are established benchmarks on price/sales, which the local investor base may not subscribe to.

Even here, I would still argue for a domestic listing. It is likely that the Indian company will get lost in an overseas listing and be orphaned. I have seen many such cases. The Indian company is lost in the clutter, one of 50 such companies, undifferentiated and covered by the junior-most analysts, with no sell-side sponsorship. Nobody shows up for the earnings call and they get no visibility at sell-side conferences.

In India, while such a company may initially receive a lower valuation, it becomes a unique focal point, attracting immense investor attention and analyst interest. The company can shape the narrative on growth and valuation metrics. If your company is seen as one of the leaders in an industry where India is structurally advantaged, valuations can expand. Just see the valuation given to Indian IT, generic pharma and auto component stocks. They are off the charts and many multiple points higher than global peers, and been so for years. Today, there is hope of this being the SaaS moment for India and these companies being the IT services of 20 years ago. I would argue that SaaS companies listed in India will trade up eventually to a premium over global peers. There may be initial valuation arbitrage to list overseas if the company is unprofitable, but this valuation gap will close as profitability is established.

India also gives you a disproportionate premium for governance and capital efficiency. Across sectors, well-governed India listed entities with capital efficiency and growth trade at huge premiums to global peers.

The Indian equity markets are also structurally favourable for listings. Currently, we have about $35 billion entering the markets from domestic investors (mutual funds, insurance,   Employees Provident Fund Organisation   and  National Pension System  ). This number will rise to at least $60 billion in the next five years. Combine this with a normalised $20 billion from foreign portfolio investors and we have a structural bid of $80 billion annually for equities. This is an extraordinarily enabling environment for new listings. The Indian markets should structurally be open and welcoming to quality listings. With this quantum of incremental flows the markets should be able to absorb all sizes and types of new listings. Indian markets have also shown the ability to value and appreciate all types of businesses at all stages of maturity. There may be a greater focus on profitability but even unprofitable companies with a clear path to making money have been given value.

An obvious disincentive to list in India is that many companies will need to flip to an Indian domicile, which has serious tax implications. I would hope our policy makers can address this issue. We can provide a one-time window where at a concessional tax rate Indian companies domiciled overseas can flip to India. This will ensure that our best companies list locally, which will make our own capital markets stronger and more relevant. Robust capital markets are a competitive advantage for the country, and anything that enhances their vibrancy should be encouraged. Moreover, such a policy could lead to a one-time tax windfall in the billions, as numerous companies flip domicile and pay a concessional tax to do so.

I am optimistic that something along these lines will be considered in the Budget after the elections. A listing is a company’s introduction to the public markets ecosystem. Its success/failure sets its reputation. Most founders do not sell in the initial sale. The founders do not need to maximise the initial sale price, they should instead target long-term-value creation. Founders must consider in which jurisdiction they will have a higher market capitalisation in five years, rather than where their initial listing price will be the highest. Founders must dictate the listing and not leave it to their selling investor base whose time horizon is understandably shorter.

The writer is with Amansa Capital