India IPOs: The road less taken

When VC-backed Indian travel site MakeMyTrip listed on the NASDAQ in 2010, it had raised $80.5 billion in an offering that valued the company at a 26% premium to the biggest online travel agencies at the time. Yet its shares still surged 80% on the first day of trading.

The IPO raised expectations that more Indian company listings abroad would follow, but none did. MakeMyTrip's parent company was Mauritius-domiciled and so exempt from the rule that stops India incorporated companies from going public overseas without prior or simultaneous listing on a domestic bourse. To get around this requirement Indian companies would have to restructure offshore - a process that takes a lot of time, money and management.

"If we had done the offshore structuring there would have been taxation issues and this dissuaded us from using that route," says Ramkumar Krishnamachari, CFO at Just Dial, which listed domestically in May.

Specifically, the promoter would have to pay a 20% tax because a share transfer is treated as a sale under the Indian Income Tax Act. It is one of several obstacles in moving an unlisted company from India to a jurisdiction outside.

In this context, the Ministry of Finance's announcement last month of a two-year pilot scheme under which approved companies can raise capital overseas without listing in India should cheer private equity and venture capital investors looking for alternative exit routes.

The pull of NASDAQ

Krishnamachari says Just Dial would have opted for NASDAQ given the choice because internet businesses are better understood by foreign investors. The US has Yelp, LinkedIn and Groupon; India has no comparable for a search company like Just Dial. This better understanding translates into a more nuanced appreciation of growth prospects, which can lead to higher valuations.

An overseas listing can also be a way of raising capital for firms that are not yet profitable. In the absence of a track record of income generation, a company must go through an onerous procedure to win approval for a domestic IPO.

"A lot of our assets are in the internet arena and therefore NASDAQ would be a very relevant market to list on," says Sanjeev Aggarwal, co-founder and senior managing director at Helion Venture Partners. "We have some cleantech assets - for example, Azure Power - which in all probability find better reception in global public markets, so this is a vehicle we will use a lot."

The Ministry of Finance and Reserve Bank of India have yet to issue notifications to implement changes to the existing rules, but some criteria for listing approvals have been announced.

One of these conditions is that the capital raised abroad may be used to retire outstanding overseas debt or for operations abroad including acquisitions.

Otherwise, it must be remitted back to India within 15 days. While this helps boost foreign funding into Indian companies and offer liquidity options that may not be available at home, clarification is required on whether the scheme can only be used for these reasons.

"Whether this results in a flurry of overseas listings depends on the manner in which the regulations are crafted, especially the use of proceeds," says Sidharth Bhasin, a partner at Shearman & Sterling. "If it's too restrictive, then companies may not go for it unless they have an immediate use for the funds overseas, such as an acquisition."

However, others are of the view that unless the authorities come out with more detailed regulations a company has flexibility to use the proceeds for other purposes before bringing them back in. "The reason to bring it back is likely related to the purpose of this pilot scheme - to bring foreign investment into India," says Sandip Bhagat, partner at S&R Associates.

For foreign investors, the question is do they have to bring the money into India and then take it out again. "I believe that this will restrict the ability of the company to keep the proceeds in currencies other than rupees," says Ravi Adusumalli, managing partner at SAIF Partners.

The guidelines are also silent on the form in which an unlisted company lists overseas and whether a rupee equity share can be directly listed. Barring a specific exemption by the RBI, it assumed that the current system of "sponsored" Global Depository Receipts and American Depository Receipts would remain. Under these regulations, if an Indian company is giving an exit to one shareholder, it would need to extend it on a proportionate basis to all shareholders.

According to Bhagat, a foreign investor looking at exit options should be asking whether an attempt to sell rupee shares through this mechanism would oblige the company to offer the same terms to everybody. If so, does the foreign investor get scaled back and are there minimum pricing regulations?

Still more questions

Other conditions require firms to file a copy of their financial statements with domestic regulators, comply with Securities and Exchange Board of India (SEBI) disclosure requirements in addition to that of the primary exchange prior to the listing abroad, and also comply with India's foreign direct investment policy.

Bhagat would like further clarity on the SEBI disclosures. "In addition to restating financials under Indian GAAP accounting rules, there are other requirements such as information about the promoter and promoter group, group companies and details on litigation, which may not be required by the overseas regulators or from a marketing perspective" he says. The regulators need to specifically identify the requirements they see as essential.

As they wait for these points to be cleared up, entrepreneurs and investors are considering the scheme's possibilities. "Is it a game changer? The answer is probably no, as without it you can still achieve the same outcome just with a lot more work," says Helion's Aggarwal. "Does it make it easier? The answer is yes."

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• Topics
• South Asia
• Exits
• IPO
• Exit
• India
• NASDAQ
• Helion Ventures
• SAIF Partners