Indian Startups Need Their Own ‘Emerge’ — Like NSE’s Trading Platform for SMEs

It was going good for Milind Padole, the founder of Pune-based Affordable Robotics, an automation solutions provider that makes assembly line robots. Since 2010, order books were up and the startup’s clients included big names such as Maruti Suzuki, Bajaj, and Mahindra. The company now wanted to expand further with plans of getting into the automated car parking space.

But, despite the business booming, Affordable Robotics was not able to able to raise finance for its expansion plans as bank loans proved unaffordable and private equity (PE) money seemed too demanding.

Affordable Robotics then turned its gaze towards a new platform called NSE Emerge — a dedicated stock exchange for SMEs to list. Within a year, it raised $4.7 Mn (INR 33 Cr) by giving away 38% of its stake (better than the PE ask). It now expects to double its revenue this year.

While NSE Emerge is proving to be a serious alternative for fundraising for SMEs, is there such a platform also for startups in India?

The answer is both yes and no.

Yes, because there are a few startups that have gotten listed on the National Stock Exchange’s Emerge platform that was launched in 2012 to provide a avenue for SMEs to raise capital.

The story of E2E, a cloud servicing company which hit the headlines in May this year when its IPO was 70 times oversubscribed, is testimony to the immense potential of the Emerge platform. What E2E’s success also proved was how investors too can benefit from such platforms — venture fund Blume Ventures, which was the first institutional investor in E2E, successfully sold one-third its stake with an ROI of over 50% in the IPO.

Some of the other tech companies that have gotten listed on Emerge are digital entertainment company silly monks and Indore-based digital solutions provider InfoBeans (oversubscribed 31 times), but the total number of startups listing is very small.

The answer to the above question is largely ‘no’, because some of the criteria for getting listed on the platform — like the company needs to be profitable before listing — rule out a majority of startups that rely on external fundraising to help them through the initial years when profitability is a pipe dream.

Indian Startups Need Their Own ‘Emerge’

India is slated to have 10,500 startups by 2020, according to a NASSCOM report. And even if we discount 90% of these startups, which are likely to fail as per popular thinking, we still get more than 1,000 startups that are likely to be successful. Given the exponential growth that comes associated with high risks, these startups could go on to become the next Ola, Zomato, or Flipkart or set a new benchmark altogether.

For this to happen, it is important to create a platform for startups to access public markets.

The idea was to do just that when the NSE launched the Emerge Institutional Trading Platform (ITP) — separate from the current NSE Emerge — in 2013. Emerge ITP was aimed at startups and promised to enable companies to list and showcase their performance to lenders and potential investors — with or without an initial public offer (IPO) — but it never really took off.

At present, Emerge ITP is on life support, which is to say that it is barely functioning, with no listings taking place after 2016.

Inc42 spoke to Ravi Varanasi, the Chief Business Development Officer at NSE and the person in charge of the NSE Emerge platform. According to Varanasi, the reason Emerge ITP hasn’t worked the way it was supposed to is because halfway through — in 2016 — the Securities and Exchange Board of India (SEBI) changed the regulatory framework, after which Emerge ITP hasn’t seen any listings.

“We had 21 listings that happened, which were before the SEBI guidelines, and now we have only 10-11 companies that are currently listed,” says Rachana Bhusari, Vice President for Small and Medium Enterprises at NSE. One of the other major limitations of Emerge ITP is that only those startups that have raised external funding of not more than $4 Mn were eligible to get listed on it.

“We are in talks with SEBI and have provided our suggestions to them,” says Varanasi. He didn’t share any more details on the talks. The NSE headquarters are at a walkable distance from the SEBI headquarters — in fact, it is right next door — in the sprawling financial district of the Bandra-Kurla Complex in Mumbai.

SEBI currently has set up a panel that is looking into ways to make listing attractive on the Emerge ITP and to identify areas, if any, which require further changes.

Even the Bombay Stock Exchange (BSE) planned to launch a platform for listing startups in July this year but had to postpone it and has not revealed any reason for doing so. The platform was aimed at facilitating the listing of companies in sectors such as IT, ITES, biotechnology and life sciences, 3D printing, space technology, and e-commerce.

“BSE has decided to postpone the split of the BSE startup sub-segment from BSE SME segment. Startups will continue to list on BSE SME segment as usual. These startups will have the option to migrate to BSE startup segment once BSE startup segment is launched,” the exchange said in a circular in July.

The BSE SME Platform, the SME platform of the Bombay Stock Exchange that was also launched in 2012, hopes to list 300 companies by December. Currently, 254 SMEs are listed on the BSE SME platform with a total market capitalisation of $2.9 Bn (INR 21K Cr).

Some startups too have listed on this platform. Early-stage B2C ecommerce startup SaleBhai, which sells range of products online like including sweets,dry fruits, namkeens (savouries), chocolates, and pickles, listed on July 27 with a view to raise $3.3 Mn (INR 24 Cr).

Startups Are Wanting To Take The IPO Route

While 2017 proved to be a blockbuster year with a record 122 companies raising a staggering $10.85 Bn through IPOs, 2018 is witnessing even greater highs. According to EY India’s IPO Readiness Survey Report, in H1 18, India recorded the highest IPO activity in terms of the number of deals across the globe, accounting for 16% of the total issues.

Even as funding in the Indian startup ecosystem dipped in H1 2018, various startups have been taking the public route to raise funds.

The IPO success story for startups started with Matrimony.com, which went public in September 2017 and received bids for 12,409,980 shares against a total issue size of 2,811,280 shares. Ebix, a global supplier of on-demand software and ecommerce services, is planning an IPO for its Indian subsidiary EbixCash in the second half of 2019 and is in talks with several merchant banks.

The Sachin Tendulkar-backed virtual gaming startup Smaaash Entertainment is planning to raise $72 Mn (INR 500 Cr) from its IPO, which is expected in December this year. Smaaash Entertainment was established in 2012 by film director and producer Shripal Morakhia.

Meanwhile, online marketplace IndiaMART recently filed its draft papers to the SEBI. It will offer up to 4.28 Mn shares for sale through its IPO, with its promoters and investors selling significant portions of their stakes.

Ecommerce logistics startup Delhivery too now looking at its next phase of growth with a $350 Mn IPO in the next few months. The company is aiming for a valuation of $2-2.8 Bn in the IPO through a mix of primary and secondary share sales.

The reason why these startups have been able to/can explore the IPO route to fundraising is that they have been able to meet the profitability criteria that most startups can’t. And this, exactly, is the point of having a separate platform for startups as the measurement and evaluation metrics vary distinctly from mid-sized or large companies.

NSE Emerge Not An Exchange For Startups

According to the Confederation of Indian Industry (CII), constraints such as high cost of credit, low access to new technology, and poor adaptability to changing trends are hampering the growth of Indian MSMEs. The same can be said about Indian startups, despite their proliferation.

Like is seen in the case of Affordable Robotics and E2E, listing on exchanges gives a company advantages like market validation, another route to raise funds, and a platform for investors to partially or fully exit their stakes in the company.

Another example of an early investor cashing in on the listing of its portfolio company is gaming company Nazara Technologies, which is expected to raise $142 Mn (INR 1,000 Cr) from its IPO.

 While the IPO will shoot up Nazara’s valuation to around $500 Mn, one of the investors, WestBridge Capital, is expected to get a whopping 75-80X return on its partial exit.

However, NSE Emerge is not really the right exchange for startups due to the inherent difference in the nature of SMEs and startups.

Ashish Fafadia, CFO of venture fund Blume Ventures, says it is important to understand that the NSE Emerge platform is meant for a certain type of companies that fall in the bracket of SMEs, which, broadly speaking, does end up including startups from a government perspective.

But, he adds, “Every startup will end up becoming an SME but every SME will not be a startup.”

He elaborates: “In my opinion, we should not look at the SME exchange as a platform where we can get exits, at least not now. Historically, venture capital and private equity firms expect that the company will do an offer to sell their shares on the exchange and that they can get a full or part exit for their investment in the company.”

Fafadia goes on to say that, at this juncture, it is not possible for an SME exchange to be an exit route for investors as the market is very small and cannot absorb or cater to full exits. But, he sees this market maturing over time where complete exits will be made possible.

In just two years, about 170 companies have gotten listed on NSE Emerge and raised $367.4 Mn (INR 2,600 Cr) in capital, with a market capitalisation of more than $1.8 Bn (INR 13,000 Cr).

The NSE Emerge is trying to breathe life into an underrepresented yet critical aspect of the Indian economy — SMEs. And the lessons learned from this journey may one day provide much-needed oxygen for the next lot of trailblazing startups to come.

But what’s the story behind NSE Emerge and how is it relevant to the journey of Indian startups to a probable exchange that actually works for them?

Emergence Of SMEs In India

India, for the most part of its existence, has followed protectionist policies. Starting from the License Raj to dragging its feet on foreign direct investments (FDI) to the recently released draft ecommerce policy, which seeks to create a level playing field for local businesses in digital trade in India and protect them from deep-pocketed foreign “sharks” — the core aim of the government on paper has always been to look out for the small, local guy.

How far it has succeeded or failed has been discussed at length by many experts and commentators, but it’s ironic that despite this protectionist approach towards local businesses, until recently, a platform to enable small enterprises to fuel their growth to the next level simply did not exist.

SMEs are an important part of our economy and contribute more than 40% to India’s exports, employing more than 40% of is workforce.

“We (NSE Emerge) got started in 2012. A small team was gathered earlier, after the government set up a task force in 2011, to come up with guidelines for SME platforms in India,” says Varanasi, about the inception of the platform.

Until then, only large companies got listed in India while a huge chunk of SMEs found themselves without access to the market, and were forced to solely depend upon bank financing. Instituting the guidelines for SME platforms was the first step taken by the government to address this problem.

Earlier attempts at providing platforms to SMEs to list had been made such as the OTC Exchange Of India (OTCEI) in 1990 and the IndoNext (launched by BSE) in 2005, but these exchanges never managed to take off — both were plagued by issues such as liquidity and low investor interest.

Hence, the odds of being third time lucky were challenging, to say the least. Varanasi, a veteran of more than 20 years with NSE, and his team understood that very well. So they started with the basics — making sure that entrepreneurs and SMEs understood what NSE Emerge was all about and how it could benefit them.

Varanasi says that in India, before the startup boom, most small and medium enterprises where family-run businesses without proper structures. They did not have their books in order and, thus, a lot of handholding was required initially. “We started reaching out to the participants, making our way first with entrepreneurs and then other intermediaries like merchant bankers. Initially, there weren’t many merchants bankers who were willing to do work with SMEs and investors didn’t know this concept fully,” says Varanasi.

To assuage the concerns of investors about the risks and worthiness of the companies getting listed, NSE Emerge initially roped in the services of noted credit rating agency CRISIL to do the due diligence of all the companies getting listed, the cost of which was borne by the exchange. This was in addition to the due diligence done by merchant bankers.

Although the exchange started operations in 2012, it started seeing traction only a couple of years ago, especially from high net-worth individuals, corporates, and small offices, who saw potential in these companies — a result of many years of all-out effort to create a market that hadn’t even existed.

“A few years back, two-times subscription was a point of celebration but today we see 200 times, 230 times… an IPO of $3.5 Mn (INR 25 Cr) fetching $706.4 Mn (INR 5,000 Cr),” says Bhusari.

According to her, a lot of interest from investors such as venture capitalists and angel investors was generated after E2E and there has been an increase in the number of people coming up and asking the team to explain the Emerge platform to their portfolio companies.

The team also conducted awareness programmes, especially for chartered accountants and company secretaries across cities, to help them understand the platform and then convey the same to their clients. “It took a lot of time for us to get the message across but once you get one company listed, the others also start taking note,” says Varanasi.

Varanasi and his team created an ingenious idea to further capitalise on this.

“Normally, bell ringing at the stock exchanges (NSE and BSE) happens in Mumbai, but for SMEs we made an exception and said we will go to the place where the company is located and ring the bell there,” explains Varanasi. “This gives a chance for the entrepreneur to call his friends and associates who are may see their success and get excited themselves,” he adds.

The idea was to create the buzz and it has proved very useful for us.

 “There are close to 430 companies (on both the SME exchanges) that have gotten listed in five years and the combined market cap of these companies is more than INR 40K Cr…which makes India’s SME market the fastest growing SME sector globally, both in terms of the number of companies getting listed every year and in terms of returns,” says Mahavir Lunawat, group managing director at Pantomath Advisory Services, which claims to be the biggest merchant banker for both NSE Emerge and BSE SME.

Will ITP Re-‘Emerge’?

It isn’t clear at the moment whether the ITP platform will continue to exist (hardly) or will a new platform be introduced to accommodate startups. Whatever be the case, the story of NSE Emerge has shown that the level of offering to attract entrepreneurs and startups will need to be unique and tailor-made and companies will have to be made aware of the benefits of listing on public platforms. In a way, that awareness has already been created by Emerge and the BSE SME platform.

But it is important to remember that what works for SME exchanges and bigger exchanges may not necessarily work for startups as the business dynamics and milestones of SMEs and startups are quite different.

“Startups are an entirely a different ball game…it’s not just about diluting conditions and giving exemptions. We just don’t need somebody to say that, here are these three-four conditions and now startups can list. We will have to make effort to tailor exchanges for startups,” Fafadia said.

What the NSE Emerge story has also shown is that if you crack the model, then, within a short span of time, the exchange can become well established.

It is safe to assume that SEBI must be taking note of all the observation and learnings mentioned above. Everyone spoken to for this article said that there are positive learnings from the NSE Emerge experience that will be incorporated in the creation of a new exchange for startups — if such a platform were to be created.

It is still early days for the SME exchange, but it has set a precedent that could become a promising avenue for startups to raise capital and for investors to exit.

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