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Why Aren’t There More Indian Startup IPOs?

Dec 7, 2020 1:08 PM 4 min read

2021 is likely to be a big year for Flipkart.

Walmart has reportedly hired investment bank Goldman Sachs to explore an IPO of the Indian e-commerce giant’s US unit for raising around $10bn. The listing could see the Bentonville-based parent company selling 25% of its stake at a valuation of $40bn - 2x higher from just two years ago when the Walmart-Flipkart acquisition took place.

Ready, Set, IPO!

News of Flipkart’s public listing comes at a time when many Indian startups are exploring an IPO themselves - either on Indian or overseas bourses.

This list is long, including the likes of Paytm, MobiKwik, Pepperfry, Byju’s, Delhivery, Zomato, Swiggy, PolicyBazaar, Ola, BigBasket and Grofers. The main sectors under watch are SaaS, edtech, healthtech, agritech, foodtech and ecommerce.

About time, too...

India now has one of the largest and fastest-growing startup ecosystems in the world, having raised over $63bn between 2016 and 2020 leading to gestation of over 27 unicorns. Significantly, the coronavirus recession did not adversely affect investor confidence, with $3.6bn being raised in Q3.

But this begs another question…


Why Aren’t There More Startup IPOs in India?

Firstly, most of them are actually eager to list considering that IPOs are a tried and tested way of raising capital and giving big, fat exits to institutions backing you early (provided strong financials and adequate investor “enthusiasm”, of course!). An RBI survey conducted last year found that 57.7% startups planned to go public over the next five years.

This eagerness has however not translated into reality. There have been only a handful of startup IPOs over the last two decades, with IndiaMART being the latest addition to the list in 2019. And that too 23 years after being incorporated.

Why haven’t there been as many Indian startup IPOs when compared to, say, American or Chinese startups? What’s holding India’s entrepreneurs back?


Comfort in Being Privately Funded

The Indian startup sector is flooded with private capital. There is so much glut that Vijay Shekhar Sharma of Paytm once called Softbank funding an “MPO” or Masa Public Offering (a pun on Masayoshi Son).

Tiger Global, Softbank, Sequoia Capital, Naspers, Kleiner Perkins Caufield & Byers, IDG Capital Partners, DST Global - the list of global investors who have placed bets on the sector is a long one.

Which makes sense. Most early-stage startups are bound for failure, thus only deep-pocketed HNIs or institutional investors are likely to hear the pitch of a startup, even at the ideation stage.

On the contrary, retail investors are lured by steady profits and dividends. Something Indian startups may not be able to afford right now.

Moreover, taking the IPO route involves increased paperwork, scrutiny and compliance. It also requires these firms to make compulsory and timely disclosures, putting their business models and strategies in the public domain.

Startups may be more comfortably raising funds from the infinite VC pool instead.


Poor Financials

Filing for an IPO requires a relatively stable balanced sheet.The average Indian investor is rather traditional in his approach - he/she seeks profits, revenues, minimal cash-burning and steady ROI.

None of these are the niche of internet startups, many of which are typically loss-making, debt-incurring, high-risk and far away from breaking even.


Cutthroat Competition

Building a value proposition and growing organically to emerge as a formidable unicorn is every startup founder’s dream. But market realities can be a formidable barrier to breach. Among these is competition - not only in operations but also in funding.

This is probably why many startups look to sell their operations to the highest bidder at the first chance possible. The goal of this “eagerness to exit” is to make a killing even if it means selling the company you nurtured and built.


Listing Norms

In India, regulations require firms to have a minimum ₹15cr as average pre-tax operating profit in at least three of the immediately preceding five years. (One of the reasons Indian bourses are considered hostile to newcomers.) That’s a tall order for startups.

An alternative would be to list on foreign exchanges - markets where there is appetite for risky investments. But this is a path only the larger and more well-known and well-backed names can consider.

FYI: Recently, a regulatory nightmare was narrowly avoided here, with the Government considering mandating dual listing wherein companies seeking to list in foreign jurisdictions would have to also list their shares in India. This would have meant higher taxes and compliance costs. Thankfully, the Government decided to do away with this proposition. 

To their credit, SEBI and NSE have announced interventions to attract more startup IPOs. The former has allowed startups to list on Institutional Trading Platforms (ITPs), a separate platform on domestic stock exchanges for such entities. Listing norms have also been eased. But there have been hardly any takers.


Market Sentiment

You can’t view the startup ecosystem in isolation. Its fortunes are intricately linked with the performance of the economy in general. And with the pandemic still raging, India in a technical recession and demand struggling to pick up, the macro winds remain dampening.

What’s more, domestic market sentiment towards startups - especially tech ones - can be rather unpredictable. When went public in 2017, the issue was oversubscribed 4.41 times. On the contrary, the first e-commerce IPO - Infibeam’s issue - was given a lukewarm reception, with not a single mutual fund applying for shares.

Will Flipkart’s IPO turn this tide? After all, the country’s digital economy has grown robustly in recent years - a trend accelerated by the coronavirus pandemic. Perhaps this may translate to more retail investor confidence.

But for this to happen, regulations might need to be made more accommodative, companies may have to make peace with disclosing more information, and the general state of the economy would have to pick up.


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