New Indian bourse set to boost trading in start-ups

An upcoming Indian stock exchange for start-ups is set to boost share sales and purchases, according to market players.

After a number of failed attempts to create such a bourse, industry participants are confident that more conducive rules will this time help it to take off.

The institutional trading platform (ITP), which is set to go live on January 1 next year, will be “helpful for both buying and selling stakes in companies,” said Umang Papneja, CIO of IIFL Private Wealth.

Papneja commented that “there has been a huge demand from the VC industry for this for a long time”.

Papneja expects the ITP to “boost confidence” that a new fund – IIFL Seed Ventures I – the wealth manager is raising will be able to execute its mandate.

Unusually, the fund will invest around 60% of its AUM in other VC funds, and 40% in direct investments in start-ups. Papneja expects most direct investment deals to be sourced from investment banks and partner VC funds but said that the ITP will increase transparency surrounding valuations for start-up companies.

Munish Randev, CIO of wealth manager Waterfield Advisors, commented that “the startup exchange will provide an exit route for very early stage funds”.

Papneja expects IIFL Seed Ventures I to reach first close in September this year, raising 50-60% of its 10 billion Indian rupee ($151 million) target. He anticipates final close within 3-6 months.

By the time that the fund reaches final close, the ITP is scheduled to be up and running, with both India’s Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE) offering windows onto the platform.

One hedge fund manager said that India has seen “many avatars” for an exchange to trade shares in unlisted companies going back to the OTC Exchange of India, which was launched in 1993. He observed that past efforts “have not been successful”.

This time, more conducive rules from India’s regulator – the Securities and Exchange Board of India (Sebi) – promise to boost the chances of success.

Sebi “is  treading cautiously towards launching the start-up exchange and crowdfunding platforms,” observed Randev.

IIFL’s fund marks a shift away from real estate alternative investment funds that the wealth manager has launched in the past. Papneja said that IIFL wants to “set up a VC start-up ecosystem”.

Randev observed that the “VC space is now booming” in India. That contrasts with Indian private equity which is still facing challenging times, said Hong Kong-based Niklas Amundsson, managing director of Monument Group.

Despite seeing two significant PE funds reach final close in July, Amundsson said that investors were still cautious about Indian PE given lingering “macro level concerns” as well as the slow pace of realisations, or exits from investments.

Last month, India Value Fund Advisors reached a $700 million final close for its fifth fund (Indium V (Asia)) while Everstone Capital Advisors closed Everstone Capital III at $700 million.

Those fundraisings marked a revival in Indian PE which has been overshadowed by the country’s venture capital industry in recent years.

One source said that the renewed impetus behind promoting the ITP – which had been the subject of rule changes by Sebi in 2013 – was a bid to maintain investor interest in India’s VC industry as well as encouraging companies to list at home rather than abroad.

Sebi loosened capital and disclosure requirement regulations for SMEs seeking to list in 2013. In June this year, the regulator approved a further loosening of rules, relaxing the requirement for companies to have a three-year profit track record before share trading is allowed on ITP. Those rules take effect on January 1.

The regulator also reduced the lock-up period for company backers, who had been subject to a three-year lock-up before they could sell shares listed on the stock exchange after an IPO. That period has been reduced to six months for the ITP, increasing investors’ ability to exit investments.

Transactions on the ITP are limited to a minimum of 1 million rupees per trade.

E-commerce, biotechnology and data analytics firms are required to have at least 25% of capital from qualified institutional investors – such as insurance companies and VC funds – to be eligible to trade shares on ITP. Qualified institutional investors are required to own more than 50% of capital for companies in all other sectors.