India Eases IPO Rules for Startups as E-Commerce Booms

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India eased rules for initial share sales by startups to allow investors to cash in on e-commerce boom and to prevent such companies from listing on exchanges abroad.

The Securities and Exchange Board of India at its board meeting today decided to eased rules linked to profitability, use of funds and valuation methodology, Chairman U.K. Sinha told reporters in Mumbai.

“Most of these startups were thinking of listing outside” India, Sinha said. “We have made a very special provision” for them now.

India is in the midst of an e-commerce boom, with UBS AG predicting the market to grow 10 times to $50 billion by 2020. Yet, the industry has been fueled almost entirely by capital from overseas, including money from New York-based investment firm Tiger Global Management LLC and billionaire Masayoshi Son’s Softbank Corp. The new rules could potentially lure Indian investors, said Gopal Srinivasan, chairman at TVS Capital Funds.

The minimum investment in startups should be 1 million rupees ($15,700), Sinha said.

Institutional investors, including mutual funds such as HDFC Asset Management Co. that manage a combined 12 trillion rupees ($187 billion) must hold at least 25 percent of the pre-issue capital of technology startups, while for others, the requirement has been set at 50 percent, he said.

Rethinking Framework

The lock-in period for founders will be six months instead of the three years for regular companies, and bourses will have a separate trading platform for startups, he said.

“We are rethinking the whole framework to make it investor oriented,” Srinivasan, a member of a Sebi’s panel on startups, said by phone from Chennai before the regulator’s press conference.

Current norms for initial public offerings include several “onerous conditions” that make it unattractive for startups to list in India, Praveen Chakravarty, an angel investor and another member on Sebi’s panel said in a phone interview.

Sebi will also decide soon on crowdfunding norms in India in what may be a framework along the lines of the U.S. Jumpstart our Business Startups Act or JOBS Act passed in 2012.

That could provide a platform for startups to raise initial seed funding prior to approaching angel investors or venture capital firms, said Abid Hassan, chief operating officer at MobME Wireless Ltd. and a member of the Sebi startup panel.

Very Vibrant

“Startups and their investors have listed their pain points to us and we have tried to resolve them,” Sinha said. “There are more than 3,100 startups in the country and a large number of M&As have also happened. The space is very vibrant.”

The country’s biggest online retailers have been acquiring smaller startups with expertise in areas such as mobile technology, payments processing and analytics, as they seek to bolster their offerings and grow their customer base.

Flipkart Online Services Pvt.’s recent acquisitions include ad network Adiquity, whereas rival has bought payments processor Freecharge, app developer Martmobi and mobile solutions company Letsgomo Labs.

At Tuesday’s meeting, Sebi also approved “fast track” issuances of IPOs for a large number of companies, and cut down the waiting period for trading to start after an offering to six days from 12.

(Corrects description of Tiger Global in fourth paragraph.)
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