Business Standard recently carried an interesting guest column on job creation through start-ups. The gist of the article was - create an " IPO-lite" (my term) environment for start-ups and India can have a job creation machine. The article certainly did not lack authority, what with both authors being distinguished members of the PE fraternity and Mr. Pai having a larger corporate role courtesy his Infosys association.
My criticisms of the article are primarily the weak logical connections between job creation and start-up IPOs. Further, in coming up with a differentiated exchange for start-ups authorities would need to consider possible scenarios which could be a slippery slope to letting in retail participation. While I attach the SEBI concept paper here, unfortunately the responses and SEBI final regulation could not be found on the website. Lastly, the unstated "this-time-it's-different" idea that seems to inspire this article could in fact be the driver of India's second dot-com bubble.
On a personal note, this is my second unpublished letter to a newspaper - baby days yet !
Link to IPO article by Mohandas Pai & Praveen Chakravarty
Discussion paper on alternate capital raising platforms and other regulatory requirements
----
“How IPO rules are linked to
job creation” (June 3) attempts to embellish the case for an “IPO-lite”
mechanism under the helpful suggestion that such proposals can enhance job
creation.
Policy
makers should re-check their assumptions before signing off on such proposals.
While there is no doubt that disruptive business models and VC funding
mechanisms are here to stay, it is a well understood that there are other
factors which govern VC movements, many of which could run counter to job
creation. Portfolio re-balancing (and re-investment) decisions of (mostly
foreign) VCs are governed by internal factors such as rate-of-return targets,
deal pipelines, and base currency movements, not to mention the relative
attractiveness of other markets. No VC is under a mandate to “Make in India”.
They are there to provide the best returns possible for their investors.
These
returns are derived on the basis of strong management and earnings growth. In
the absence of tangible earnings or a management strong enough to deliver it,
any proposed exchange will quickly descend into a VCs “musical chairs” with
eager participants queuing up for a chunk of shares from the early prospectors/insiders
before the next round of fund-raising commences. Setting up an exchange with
only institutional investors are participants is also a slippery slope to
retail markets. Would MFs and/or pension funds be allowed to invest and if so,
are they not deploying retail money? What happens if a start-up (with
stratospheric valuations) buys a company on the main board and wishes to pays in stock? Does the exchange not discriminate against brick and mortar firms who might be
in the same sector and unable to “IPO-lite”?
The article
is silent on these issues. Ironically the market factors that the article
helpfully lists as the cause of poor IPO performance are the same that can stymie the “IPO-lite” policy – lofty
(start-up) valuations, poor diligence (institutionalized) by merchant bankers
and greedy entrepreneurs (and their VC backers). Is the scene being set for
India’s second dot-com bubble?
