No Flurry of Indian Startup IPOs Seen on Liquidity Concerns

India’s loosening of rules for listing startups is unlikely to lead to a flurry of initial share sales as poor liquidity and a lack of experience in valuing internet and technology companies hamper investor appetite.

The market regulator’s decision this week to ease rules governing profitability, use of funds and valuation methodology, are a good first step in opening up the market, though finding a large pool of investors will be a challenge for the first crop of IPOs, U.R. Bhat, a director at the Indian unit of Dalton Strategic Partnership LLP, a U.K.-based investment management company.

“Currently, the appetite for IPOs is not good,” Bhat said over the phone. “This market needs investors with a really long-term view and the capacity to take losses for the first few years.”

India’s e-commerce boom has been fueled with money from overseas venture capital and private equity firms. The decision by the Securities and Exchange Board of India is meant to encourage high-growth companies to keep their wealth within the country’s shores. Very few Indian investors have the experience in valuing companies in modern industries, such as e-commerce, which take years to generate profits, said Taher Badshah, co-head of equities at Mumbai-based Motilal Oswal Asset Management Co.

“The two issues that deter investors are liquidity and the ability to assign some value to exposure,” Badshah said. “One could end up under or overstating the value.”

Critical Number

It will also be tough to get a critical number of investors who are attracted to startups, said Vijay Shekhar Sharma, founder and chief executive officer of One97 Communications Ltd., which runs the payment processor Paytm. Valuations abroad will probably be significantly higher than those in India, he said.

Startups go abroad “as the number of investors you can address is far bigger,” Shekhar told Bloomberg TV India on Wednesday. “In other parts like London and Singapore, you can front load costs and market is very supportive of that.”

The rapid ascent in these startups’ private valuations makes their market value comparable to some of India’s best-known companies that have existed for decades and consistently generated profits for shareholders.

The most recent fundraising for Flipkart Online Services Pvt., India’s biggest online retailer, puts its value almost as much as the market capital of Mahindra & Mahindra Ltd., a 70-year-old conglomerate, which is also India’s biggest maker of sport utility vehicles.

Private Equity

Getting investors to fork out such multiples for companies that don’t have a clear path to profitability, will be a “substantial” challenge, Dalton’s Bhat said.

If the new rules lead to more public listings, it could make it easier for private equity and other early investors to score exits, said Vijay Ghadge, founder of package delivery company Gojavas Pvt.

“It’s a very encouraging sign,” Ghadge said over the phone. “There would be some in the private equity community who would be very happy about this.”

Private equity firms entered into $51 billion worth of deals in India from 2000 to 2008; of these, only about 30 percent have so far exited, according to a McKinsey & Co report from December. Typical horizons for private equity investments range from five to seven years.

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