The e-commerce industry has been currently expectantly waiting for the roll-out of various reforms which were proposed last year by the Securities and Exchange Board of India (SEBI), the regulator for the Indian securities market. These roll-outs were aimed towards enhancing capital investment and fuel growth in the e-commerce sector.
Currently the e-commerce sector is experiencing great enthusiasm to avail public listing options (as is evident from the approval granted last year by SEBI to Infibeam Incorporation, the first e-commerce company, to list its shares). Raising funds through IPOs has been a herculean task in India because of SEBI’s stringent listing requirements, which includes profitability criteria for at least three years and lock in on promoters’ shareholding of at least 20% for three years.
Most e-commerce start-ups are focused on increasing their market share instead of profits in initial years. The high cash burn rate of giants like Flipkart and Snapdeal, due to heavy discounting strategy, is a classic example of this focus. Becoming profitable without having enough market share could be a recipe for disaster, but acquiring customers base through continuing discounts is also not a feasible strategy in the long run.
With a large scale of operations and backing from top-notch investors, the most viable option to ensure exit of an existing investors in these e-commerce companies is to take the IPO route. Last year, SEBI announced its intentions to introduce thee-IPO norms for the e-commerce sector, which will include enabling startups to raise capital by permitting them to list their securities on the ‘Institutional Trading Platform’ in an SME exchange.
Under the e-IPO norms, amongst other things, SEBI is likely to ease the profitability restrictions and also reduce the lock-in period to six months for the e-commerce startups. However, for the time SEBI is likely to keep the retail investors out of action as it considers the start-up game too risky for small investors. The regulator is restricting the use of this e-IPO platform to institutions and high net worth individuals only.
Under the e-IPO norms, the minimum application size as well as trading lot would be INR 10 lakhs with an option provided to startups to migrate to the main stock exchange after 3 years of listing. This will be subject to their compliance with eligibility requirements of the stock exchanges.
This move by SEBI was hailed by the startup community as it enables them to get access to local money rather than being dependent on institutional investors or overseas listing. E-commerce players, however, feel that the regulator is depriving small investors of the growth prospects, which have forced it to put together the e-IPO norms.
Another initiative taken by SEBI which will benefit any e-commerce startup is ‘Crowdfunding’. SEBI has recognized crowdfunding as an innovative way to provide funding to young entrepreneurs, who are in need of early stage capital to fuel their startup ventures. SEBI has proposed three routes: namely Equity, Debt and Fund-based crowdfunding. QIBs, HNIs and Eligible Retail Investors (‘ERI’) are likely to be eligible for crowd funding, based on their net worth. However, the consultation paper released by SEBI lacks