India’s primary market, after showing signs of animation for the last couple of years, seems to be sinking back into its habitual stupor. Data from Prime Database suggests that domestic public offers after managing a sharp jump in fund-raising to over ₹98,984 crore in FY18, raised just ₹36,405 crore in FY19, with the amounts further dwindling to ₹13,708 crore in the first eight months of this fiscal. With the number of offers dipping from 81 in FY18 to 20 this fiscal, over two dozen firms that had filed prospectuses with SEBI have shelved their IPO plans. Given that India’s primary market has always been a fair-weather friend, buzzing only during bull runs, the recent ebb in activity isn’t surprising. But it is worrying, nevertheless. A strong primary market is critical to refreshing India’s ₹145 lakh crore listed universe which is over-run by old-economy businesses. A stalling IPO pipeline presents a formidable roadblock to the thriving start-up ecosystem, where private equity and venture capital investors have bank-rolled over 7,000 start-ups, hoping to unlock value through public listing.
There are several reasons, rooted in policy-making, why so few of domestic micro-enterprises make the transition into listed companies. At one level, the high bar set by the Securities Exchange Board of India (SEBI) for a company to tap the public markets has made it difficult for even unicorns from the start-up ecosystem to list on the main board. SEBI’s stringent eligibility norms for companies looking to launch IPOs in terms of minimum promoter holdings, issue size limits based on net worth and a three-year profit record pose formidable barriers to listing. The book-building route offers an alternative but requires compulsory reservation for Qualified Institutional Buyers. These norms are far more stringent than those imposed in other markets and may perhaps merit a review by SEBI. But a second and more important reason for the failure of micro-enterprises to attain any material scale, is the perverse incentives offered by India’s industrial policy, labour and taxation laws for firms to remain sub-scale. The draconian SSI reservation policy, a MSME definition based on restrictive turnover, investment and employee criteria and significant tax and regulatory arbitrage between MSMEs and their larger peers, actively encourage firms to remain stunted. The 2019 Economic Survey had highlighted that, contrary to popular perception, firms employing less than 100 workers made a minuscule contribution to value added and jobs, despite accounting for 85 per cent of India’s manufacturing sector.
Even as MSMEs figure prominently in banks’ priority sector lending targets and large-sized firms manage to hog bank credit, mid-sized firms remain hampered in their scaling efforts by the non-availability of working capital, resulting in high mortality rates. Getting rid of the size obsession in industrial policy design and ensuring seamless capital availability to see start-ups through their growth stages, are essential to ensure that India’s primary markets grow out of their stop-start mode.