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Will Easing Of Start-up Listing Norms Make Investors Lose Money?
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If you play in the share market and have the capacity to invest Rs 10 lakh in an IPO, very soon you might be buying the shares of an India start-up. But be cautious, as the relaxing of norms for the start-ups by the Securities and Exchange Board of India may make a lot of investors lose their money.
“Start-ups by their very nature are risky investments. Thus Sebi has done well to keep the retail investors out of the start-up market. The retail investors, given their limited access to research and data, are ill-placed to take exposures in companies with fewer disclosures. However, institutional investors should also remain wary since rules such as these doing away with standard valuation parameters such as P/E,EPS (which of course may not be relevant for start-ups) may have a tendency to create a bubble in the start-up market which may bust later on,” said Deep N Mukherjee, Senior Director, Corporate Ratings, India Ratings & Research.
The decision has been taken despite historical data indicating that a majority of IPOs start trading below their listing price within one year of their launch. According to data provided by Prime Database, in 2008, 81 per cent of the listed IPOs were giving negative returns within one year of their listing. In 2009 and 2010, the percentage was 50 per cent and and 82 per cent respectively. The situation was a little better in 2014 because of the stricter disclosure norms that Sebi had brought in for traditional companies. However, the relaxation for start-up in the disclosure norms is likely to spurt the percentage of negative returns once again.
Mukherjee further adds “if there are not enough disclosure by such companies, investors may lose money because start-ups often have unique business models or products which may only give an illusion of easy understandability."
According to the Sebi statement, the standard valuation parameters such as price to earnings, earnings per share and so on may not be relevant in case of many such (Start-ups) companies and the basis of issue price may include other disclosures, except projections, as deemed fit by the issuers.
By doing away with disclosures like price to earnings, earning per share of the company, Sebi is allowing the companies to not disclose the profitability of the businesses. Instead of these norms, the companies will be disclosing information like ‘traffic on the website, conversion of visit into customers etc.
“A lot of tech companies have not made money in many years. There would be many such companies which will look attractive as per revenue but take decades ,if ever to generate free cash flows,” adds Mukherjee.
For example, Jabong, an online fashion retailer, incurred a loss of Rs 293 crore on revenues of Rs 438 crore in 2013-14. This means the company loses Rs 33 on revenue of Rs 100.
Even Flipkart, the largest online retailer by revenue, has not made profit yet. The company is valued at $11 billion but investors like Rakesh Jhunjhunwala have questioned the business models of the company openly.
While Sebi is under pressure to stop the flight of Indian start-ups to the foreign markets to raise money, but it also needs to ensure that the Indian investors do not lose money by investing in these companies. Sebi is treading a risky path by allowing start-ups to list without letting investors understand their business models.
A question from Jhunjunwala in a TV interview explains the risk of investing in start-ups, “the real companies who have given returns to investors had been built by the cash flows of those businesses, not by investors”. We know that most of the Indian start-ups have been burning investors’ money to show revenues on their books. Should one invest in such start-ups without knowing enough about their profitability?