After witnessing an IPO boom in the 2021-2022 fiscal, new-age Indian tech startups are in a lurch to go for the new listing. The 2022-2023 financial year is yet to witness a public listing proving to be a damp squib as companies hit the course correction mode after the market gave a reality check to some of India’s high-profile startups.
The ambiguity behind deferred IPOs clouds the bumpy ride many investors are trying to evade. The self-imposed reckoning from the share market has sent tremors across the sector. In March 2022, Softbank-backed hotel aggregator Oyo’s parent Oravel Stays Limited requested an exemption from the Securities and Exchange Board of India (SEBI) on their website.
There are reports that Oravel Stays have also slashed the size of its issue. The nature of the exemption was not explicit, but sources privy to the matter said that the startup is seeking to file an updated Draft Red Herring Prospectus. The company filed its first DRHP late in 2021 for its initial IPO, but since then, it has been delaying it.
The same is true for Delhivery, India’s most significant B2B third party logistic player. The delivery giant was planning to go public by March 2022. Still, it later deferred the idea, just like E-pharmacy startup PhramEasy, which not only deferred its filing but have also slashed its offering by almost 50 percent.
Experts are witnessing a decline in India’s IPO gauge after a surge since 2019. Here are five reasons that seem to be ailing most new-age technology companies in India as they rethink their strategy to go public.
Creating the right product
Famous as the Big Bull of the share market in India, Rakesh Jhunjhunwala, a prominent stock trader and investor, has always been critical of new-age stocks and has played them down, citing the lack of a sustainable business model for the long run. Experts also believe that most Indian startups have failed to create a unique value proposition. An example of this failure on the stock market is Paytm. According to market experts, Paytm has concentrated more on the valuation game and deviated from the ultimate objective of scaling up. As a result, its stocks have taken a massive hit on the Indian bourses.
The reminiscence of the dot-com era
An IPO aims to raise money and provide liquidity to existing investors. Once a company is publicly listed, it enjoys many benefits, but it comes after a complex and lengthy process exposing the company to increased scrutiny and transparency. This comes with the burden of gaining new investors and an increased regulatory burden, and not all startups are cut out for such scrutiny. In addition to it, according to market research firm Gartner retaining investors is more challenging for technology companies as the skepticism that has been infused in the market since the dot-com bubble burst is yet to erode.
The fear of the unknown
The Indian startup sector is flooded with private capital and Indian startups have mastered valuations, which gives them access to steady capital flow to run their show. The companies that have filed for IPO in the last few years are the ones that have taken the leap of faith under able and strong leadership. However, as soon as the share price of new-age technology companies started tanking in the market, the entourage of startups following the trend are now cowering back to their comfort zones. A company can’t convince its retail investors in the name of scaling up and technological innovation by burning cash that fails to show profits on the book. On the contrary, exit through IPO might be beneficial for its investors, but only when the company can lure retail investors by showing them steady profits and dividends. This is a grey area where Indian startups are failing to perform.
Stringent Listing Norms
Indian market regulators mandate that a company should have INR 15 crore on average as a pre-tax operating revenue. The mandate is for at least three years for the preceding five years. This is a tough call for startups. An alternate way to list is on a foreign exchange with a stomach for a much riskier investment. However, after prominent entrepreneurs wrote to the Indian Prime Minister on the issue, the government recently unilaterally froze its plans to allow foreign listing. The decision was made public on March 24, 2022.
Unpredictable Market Sentiments
One can’t view that market in isolation, especially for the startups going public. It is intertwined with the upheavals of the economy. Since 2019 India has witnessed an IPO boom, but at the same time, the market has been laden with one crisis after the other. This might be why the companies that went public during the time failed to perform, and based on their performance, the companies that are mulling going public are looking at a course correction to avert the backlash from the market.
Even before the market recovered from the hit it took due to the pandemic, the difference rising between the two world superpowers US and Russia, over the war on Ukraine has sent most new-age technology stocks tumbling down globally. Even the Indian market is witnessing the upheaval, with companies like Nykaa, Zomato, and Paytm facing the heat. As a result, unicorns and soon-unicorns gearing up for their market debut have delayed better comprehending the situation.