Among the various challenges India’s small businesses and startups face, it would be safe to say that providing exits to investors remains one of the biggest. Data from research firm Venture Intelligence shows that investments worth over $10 billion were made in Indian companies at the Series D stage in 2017 and 2018 up to September. While providing exits to investors through an initial public offering (IPO) would be a logical next step for such entities, the state of primary markets today may not inspire these SMEs and startups to take the IPO leap, and offer PE and VC investors an exit. While private equity players and venture capitalists secured exits worth $4.8 billion from 23 IPOs in 2017, this year (till September) has seen just $2.3 billion in exits from 13 IPOs.
As for the scenario today, Prime Database Group’s analysis suggests that 51 companies hold approvals from Sebi to list on stock exchanges to raise an aggregate value of Rs 59,000 crore. About 26 entities have filed their draft red herring prospectus, and await approval.
On October 26, Sebi released a discussion paper proposing to tweak listing norms for startups to make going public more attractive for companies working on emerging technologies. The regulator has renamed its institutional trading platform (introduced in 2015) innovators growth platform, and has invited comments till November 16.
Pranav Haldea, MD, Prime Database Group, does not expect to see new IPO launches any time soon. “IPO is an once-in-a-lifetime event for a company and they would not like to launch in a bearish or volatile market. I don’t foresee any launches in the next few months,” he said. Sebi’s listing approvals are only valid for a year. Haldea said that he wouldn’t be surprised if the market went the 2011-2014 way, when IPOs with Sebi approvals worth Rs 70,000-80,000 crore could not launch.
Gaming subscription services provider Nazara Technologies received Sebi’s go-ahead for IPO in April this year. Nitish Mittersain, founder and MD, Nazara Technologies, said the company is in talks with merchant bankers, and will go for an IPO when advisors deem fit. He added that the company is profitable and is well funded with internal reserves. Nazara’s existing investors include IIFL Asset Management, Rakesh Jhunjhunwala, WestBridge Capital and German e-sports major ESL.
On the investor side, IIFL has pre-IPO stage investments in Nazara Technologies, Bikaji, ICICI Lombard, SBI Life, and others, through IIFL Special Opportunities Fund, which focuses on investing in companies in the pipeline for IPO. Prashasta Seth, CEO, IIFL Asset Management, said the risk of subdued IPO markets is one they had factored in. “As a result, our investments were focused on quality companies with strong management, robust balance sheets and leading in sectors seeing long-term growth. These companies will be the first to go for an IPO when the market environment stabilises,” he said.
Arun Natarajan, founder, Venture Intelligence, said that while a subdued IPO market is an inherent risk for investors, if the company’s fundamentals are strong, there may not be cause for investors to worry. They may just have to wait for the markets to improve. A continued fall in the value of the rupee as against global currencies may add strain to investors’ books.
A Nasscom report on India’s startups released last week noted a sharp increase in Series C, D, E and F investment rounds, signifying a healthy pipeline of IPOs for the years ahead and a maturing ecosystem. The latestage funding in these rounds saw a 250% increase to $3 billion between Jan-Sep 2018, up from $847 million during the same period in 2017. Startups are also showing signs of scale as 2018 saw the addition of 8 unicorns, taking the total number of Indian unicorns to 18.
Finding success in the primary markets depends on the company’s ability to seize a window of opportunity. For instance, Chennai-based Matrimony.com was able to go public in September 2017 only in its second attempt. The company had filed its draft IPO papers in August 2015 but could not proceed.
IIFL’s Seth said 2017’s buoyant IPO markets kept their fund’s focus on pre-IPO companies. This year, their focus is on enterprises that are “at the IPO stage”, and post listing, where stocks are available below IPO price. “This is helping us optimise the returns for investors as well as capture the best value,” he said. “We expect the market environment to stabilise in six to 12 months, leaving us reasonable time to exit the investments over the life of the fund,” said Seth.