To date, the growth of these ‘Silicon Valley’-type startups in India has been funded by global venture capital, technology funds and private equity, who have made billions of dollars in similar companies in the US and China. These companies have served their shareholder base well, grown in scale and rewarded their investors with handsome returns. For example, the sale of Flipkart to Walmart valued the company at $22 billion and turned its two 37-year-old founders into billionaires.
Domestic investors, and even large corporates, are now entering this sector with organic build-ups and inorganic acquisitions. The recent $2 billion acquisition of BigBasket by Tata validates this trend. As these companies now outpace some of their existing shareholder base, they are looking to list on the Indian stock exchanges to access more mature and late-stage capital, and help their early investors monetise their stakes. This is a departure from the conventional route of ‘finding value in the US market’.
Indian capital markets now have the appetite and maturity to reward those companies and their first-generation founders, who successfully steered their nascent businesses to scale through the Covid-19 pandemic. In the coming months, India should see initial public offerings (IPOs) of home-grown startups including Paytm, Zomato, Nykaa, Delhivery and Policybazaar. Even startups like Flipkart, Lenskart and Freshworks could follow the same listing track.
The successful listing of these early birds will be a trendsetter for this sector. To date, venture capitalists and private equity investors have sought legal structures to facilitate international listings of their investee companies, which can help them quickly facilitate their exit overseas. Such structuring involves a complicated process that features cost and tax leakages, in addition to creating complex multilayering.
In contrast, an Indian listing will provide a clean and simple new exit route for funds invested in startups in India, which will then attract greater pools of global capital to the startup universe. More sovereign wealth funds, pension funds and deep-pocketed technology funds will look to invest in the Indian tech ecosystems when they feel more confident in their exit options.
Sebi has played an essential role in capturing the potential of startups looking to go public. It has formed an Innovators Growth Platform (IGP) that large institutions and wealthy investors can access, and implemented changes to the listing rules on the IGP that have made a huge difference in easing the listing process for startup companies. Some of these changes include reducing the time of earlystage investors to hold 25% of preissue capital to 12 months from 24 months, and allowing IPO-bound startups to allocate up to 60% of the issue size to any eligible investor with alock-in of 30 days.
The validation of these unicorns on the bourses will demonstrate that India is not just the back office of the world, but also has the ability to use cutting-edge technologies to provide fintech, ecommerce and green energy solutions. Over time, these companies will add not just a new sector to Indian capital markets but also another $100-150 billion to Indian-listed companies’ market capitalisation.
In the US and China, technologydriven companies are generating maximum returns for shareholders. Faang — Facebook, Apple, Amazon, Netflix and Google — have accounted for an extensive portion of the market gains and economic growth over the last decade in the US. The stay-athome economy accelerated their growth trajectories, with most aspects of people’s lives shifting online.
Faang stocks have met and consistently over-delivered on investors’ expectations by offering high-grade sales and escalations in profits. Today, Faang constitute about 21% of the S&P 500 market value. Indian capital markets could be on the brink of witnessing a similar watershed event, possibly providing an avenue for the fastest capital creation the country has ever seen. The success of these issues will establish the fact that Indian capital markets now have the prowess, intelligence, resources and conducive regulatory environment required to invest in these gamechanging companies.
The writer is CEO, Moelis India.