Sebi took a triad of decisions this week to encourage startups to list in India. This should strengthen the trend of reverse flipping from more business-friendly foreign jurisdictions. Startup founders can now hold on to employee stock options issued a year prior to filing for an IPO. Investors in convertible securities are no longer needed to hold shares arising from such conversion for at least a year. Shares held by some categories of investors can be counted among what promoters have to put up for listing. The markets regulator is, thus, addressing intent and means to list in India. The relaxed regulatory stance fits into the Indian investor appetite for quality paper that draws startups back to the country after exploring deep VC markets abroad.These decisions matter, because they appreciate the distinction between startups and traditional businesses. Sweat equity is a means of deferred compensation for startup founders who go through several rounds of equity dilution before they can take their company public. Leadership continuity is preserved if founders remain invested in their companies post-listing. Widening the pool of investors who can participate in a startup’s public issue, and lowering the founder’s minimum contribution to the issue, ought to make the market more liquid. Sebi’s decisions were taken against the backdrop of a rising number of Esop buybacks and IPOs by startups. This is a good time to make the Indian equity market more friendly for startup founders.Separately, Sebi is setting the stage for broader foreign participation in gilts as several global indices incorporate India’s sovereign debt. Easier disclosure requirements will be imposed on FPIs operating exclusively in the gilts segment. India is anticipating substantially larger foreign inflows into its gilts market, and is seeking tighter integration in global bond indices. Relaxations on periodicity and extent of disclosures for the special category of FPIs in the government bond market should aid the process.
