Last week, the SEBI (Issue of Capital and Disclosure Requirements) (Fourth Amendment) Regulations, 2015 were issued to facilitate listing of start-ups on institutional trading platforms (ITPs) in India. The regulator is optimistic that start-ups which list on ITPs will eventually grow and move on to list on the main market. This is certainly a move in the right direction. But if the regulator is genuinely interested to give a boost to Indian start-ups, it should supplement this measure by facilitating Indian start-ups' access to international capital markets through depository receipts.
However, the SEBI Chief's recent comments seem to suggest otherwise. Regarding the implications of this new start-up listing regulations, Mr. U.K. Sinha reportedly remarked: “I am hopeful that many of these companies, which were being approached by Singapore and New York exchanges earlier, would come and list here.” This seems to suggest that these new listing norms are more in response to some start-ups' eagerness to list abroad. The regulator seems to be under the impression that foreign listing of Indian start-ups is undesirable from a policy perspective.
We argue that this line of reasoning is fallacious. Listing on an Indian ITP is not necessarily a substitute for admission to trading or listing on a foreign trading platform or exchange. Unlisted Indian start-ups may want to access foreign capital markets like New York or Singapore for various inherent commercial advantages which Mumbai cannot offer.
Why do firms list abroad?
Substantial literature already exists on this subject. The Sahoo Committee Report on depository receipts also addressed it. Some of the potential reasons relevant for the present purpose are explained below:
1. Cost of capital: Cost of capital is more important than mere access to capital. If AIM in London offers better cost of capital than NYSE in New York, it makes sense even for a US company to list on AIM. The same logic applies to start-ups in India. If a Bangalore based start-up is getting better cost of capital in New York or Singapore as compared to Mumbai, it should be free to choose the former. Forcing it to stick to Mumbai over New York or Singapore is not in the best interest of the start-up; however, Indian stock exchanges will clearly gain out of such a policy since it would shield them from competition with the international capital markets.
2. Better valuation: Certain jurisdictions have advantages in particular sectors with sophisticated sectoral analysts offering better valuation. Let us assume a company operates as an unlisted Indian start-up producing niche chocolate products. There are five options to list: Mumbai, New York, London, Singapore and Switzerland. Such a company may legitimately prefer to list on the Swiss Stock Exchange (SIX) which dominates the European food products industry (Nestle SA is listed there) and is likely to give the company a better valuation. Plus, that may also benefit its brand of chocolates by associating it with Switzerland. Asking it to list in Mumbai may not make much commercial sense.
3. Brand visibility and business operations: A start-up may be exporting products to a foreign market where it intends to expand its business. In that case, the start-up may want to list in that foreign market to enhance its brand visibility – Howson and Khanna refer to this as consumer-commercial markets bonding. Although listed in India, Infosys was driven by similar considerations when it undertook a US listing in the late 1990s. Also, raising capital in the currency of that foreign jurisdiction, for business operations there, would help it hedge currency risks. Anexample of this phenomenon are Japanese companies with business interests in mainland China listing in Hong Kong.
As is evident from the above examples, there are myriad commercial reasons that may motivate unlisted start-ups to prefer listing abroad rather than listing domestically. Cost of capital, although important, is just one factor. Left to itself, an Indian start-up may for genuine business interests (beyond capital raising) prefer a New York or Singapore listing over Mumbai.
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