Big Blow For Startups: Indian Govt Shelves Overseas Listing, Says Local Capital Markets Enough

India has shelved its plans to allow local companies to list on markets overseas. The country has now shifted its focus to shore up its own capital markets, government officials and industry sources told Reuters.

This is a blow to foreign investment funds and stock exchanges, who have been trying to tap into India’s tech stocks boom, powered by the upsurge of the country’s startup ecosystem.

After clarifying last year that Indian companies can be listed in overseas markets, but won’t then be considered Indian startups, the Ministry of Corporate Affair (MCA) has reportedly made a 180-degree turn on that decision.

Three senior government officials, cited by Reuters, have said that the government has put these plans on hold because the government believes that India’s local capital markets are enough to support India’s startup ecosystem and reach a good valuation.

That might be the case, for the time being, considering Indian startups recorded the highest venture capital inflow to date in 2021 with $42 Bn raised across 1,583 deals. In all, the Indian market also saw 42 new unicorns in 2021, according to an Inc42 report, where Indian unicorns have a combined valuation of over $329 Bn to date.

This has seen multiple startups over the months submit their draft red herring prospectus (DRHP) to SEBI and prepare for IPOs.

BYJU’s and Pine Labs are two of the Indian unicorns that are eyeing, an IPO abroad. Pine Labs have been raising funds at a prolific rate before it goes the same route as Freshworks, listing on NASDAQ in a reported $500 Mn IPO. On the other hand, BYJU’s is in talks with 4 SPACs for a merger to allow listing in the US, Bloomberg reported in January.

Meanwhile, Freshworks, the Indian SaaS company went public in a $100 Mn NASDAQ IPO in August 2021 at a valuation of $10 Bn. The valuation rose to $13 Bn hours after listing, however, it has since come down to $5.78 Bn (as of March 24, 2022).

In 2021, 11 Indian startups — EaseMyTrip, Nazara, Zomato, Freshworks, CarTrade, Nykaa, Fino, Policybazaar, Paytm, RateGain and MapMyIndia — went public. These startups have raised more than $7.3 Bn from IPOs. 

Many of these startups, however, are facing strong headwinds on the stock markets, with Paytm being the most infamous case. The freefall of the share price has been so shocking that the BSE had to ask Paytm about the same a couple of days ago.

Like all the other global markets, India’s market has also taken a hit in the aftermath of Russia’s invasion of Ukraine. The volatility the invasion has introduced has seen many companies delay or reduce their IPOs, including the likes of PharmEasy, MobiKwik and OYO.

Government Doing A 180, Leaving Listing Rules In Limbo

The government officials cited by Reuters cited the recent listing of Zomato as a contributing factor to the change of heart that the government has had with these rules.

Food delivery startup Zomato’s initial public offering (IPO) was oversubscribed by 38.96 times on the final day of bidding. Overall, the INR 9,375 Cr Zomato IPO received 2,751.27 Cr bids for a total issue size of 71.92 Cr equity shares, according to data from the National Stock Exchange (NSE).

The Qualified Institutional Buyers (QIBs) portion of Zomato IPO was oversubscribed the most at 51.79 times the size of the offering. Foreign Institutional Investors (FIIs) led the QIB portion, followed by banks, financial institutions, and mutual funds companies. On the other hand, the retail individual investors (RII) portion which consists of 10% of the overall IPO offering was oversubscribed by 7.45 times.

However, currently, Zomato’s share price is at INR 80.40, slightly higher than its offer price of INR 80, but a far cry from the INR 160.30 that it hit on 15th November 2021.

The loss of the gains that these startups have seen during the immediate aftermath of their IPOs have put the government off from moving towards letting companies list abroad.

The move will also wipe the smiles off the faces of stock exchanges in places such as New York and London, which have been looking to get a slice of the Indian startup pie.

Startups & Investors Lobbying For Going Global

In 2021, founders and CEOs of 22 leading startups and venture capital firms had jointly written to Prime Minister Narendra Modi, urging the government to allow direct overseas listing of Indian companies.

The group, which includes the likes of Swiggy cofounder Sriharsha Majetty, CRED founder Kunal Shah and Rebel Foods’ cofounder Jaydeep Barman among others, has urged that allowing companies to list overseas would be a significant ‘big-bang reform’ giving Indian startups global recognition.

The signatories to the letter include, apart from the ones mentioned above, founders like Amrit Acharya (Zetwerk), Abhiraj Bhal (Urban Company), Anindya Dutta (Stanza Living), Ashneer Grover (BharatPe), Amit Jain (Cardekho), Asish Mohapatra (OfBusiness), Gaurav Munjal (Unacademy), Byju Raveendran (BYJU’S), Souvik Sengupta (Infra.Market) and Kunal Shah (CRED).

From the investor community, Ravi Adusumalli (Elevation Capital), Rajan Anandan (Sequoia Capital India), Scott Shleifer (Tiger Global), Prashanth Prakash (Accel), Jishnu Bhattacharjee (Nexus Venture Partners), Neil Mehta (Greenoaks), Niren Shah (Norwest Venture Capital), Bejul Somaia (Lightspeed India), Navroz D Udwadia (Falcon Edge Capital) and Vikram Vaidyanathan (Matrix Partners India), among others, have signed the letter.

According to the letter, startups need access to international capital to level the playing field with foreign technology giants and be globally competitive. It said the total market cap of all the companies listed in India is about $3 Tn, while the comparable number for the US is $50 Tn.

This move has been under consideration since 2020, however, it is a very divisive move, as it had divided stakeholders and policymakers alike.

The Peaky Circumstances Of Opposition

Swadeshi Jagran Manch has opposed the plan of Indian companies listing overseas for a long time now. They have argued that India will lose oversight on companies that go for a listing overseas and local investors would find it hard to trade in shares of such companies.

According to a source cited by Reuters, representatives of Swadeshi Jagran Manch lobbied the finance minister in a closed-door meeting in January to not proceed with the policy announcement. This happened after the revenue secretary had said that the government will announce a policy framework for listing startups abroad by February.

It is not clear what exactly has prompted the move to shelf plans for the time being, but it only serves to create more uncertainty in an already volatile market.