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Science & Technology
- GS 3 || Economy || Services || Startups & Entrepreneurship
Why in the news?
Paytm has filed a draft prospectus with the capital markets regulator to raise Rs 16,600 crore ($2.2 billion) in what will be the biggest Indian initial public offering (IPO) in at least a decade.
- The Paytm IPO will comprise equally of a fresh issue worth Rs 8,300 crore ($1.1 billion) as well as a secondary issue or an offer for sale of the same size, the Noida-based fintech firm has told the Securities and Exchange Board of India (Sebi).
- Paytm may also consider a pre-IPO funding round of up to Rs 2,000 crore and if that happens the size of the fresh issue will be accordingly adjusted, the filing stated.
- The company didn’t divulge the valuation it is seeking in its IPO, however, sources in the know told ET that the company is targeting a valuation in the band of $24-$30 billion.
Understanding Startups and IPO:
- Startup: Startups’ are understood as “entities, which are in the early stages of setting up their operations, and work towards innovation, development, deployment, and commercialization of new products, processes, or services driven by technology or intellectual property”. The number of Startups in India and worldwide is on the rise, and they are now being widely recognized as important engines for growth and jobs generation.
- Opportunities and growth in startups:
- Fastest-growing major economies: India is one of the world’s fastest-growing major economies, with a GDP growth rate of 7.0 percent in 2018 and the world’s second-largest population. As a result, the Indian market provides a plethora of startup prospects.
- Incomes and purchasing power in India are growing as the economy grows. Half of the country’s population is under 25 years old and has material aspirations.
- Satisfy local requirements: Because of India’s vast cultural, linguistic, ethnic, and religious variety, regional businesses with the ability to satisfy local requirements have a lot of room to develop.
- Scalability and exponential: Given India’s size and limited resources, low-cost, high-impact solutions are necessary. Because of their scalability and exponential growth potential, technology companies play a critical role in achieving this.
- Technical advancements: Over the previous several decades, technical advancements have lowered the cost of developing digital products and opened up consumer markets; for example, India’s widespread internet adoption.
- Increased political will: A new social infrastructure is being built as a result of increased political will and government backing through programs such as Aadhaar enrolment, digital India, and Startup India. This will encourage financial inclusion and provide an atmosphere conducive to the creation of new businesses.
- How can India’s startup ecosystem be strengthened?
- Startups are not isolated entities; they are a part of the larger economy. Policy changes, improved general economic circumstances, and investments in digital and physical infrastructure (such as internet connection, roads and public transit, and power and energy) may all help India’s startup environment.
- Investors nowadays want to support more established businesses with some market validation. There is a need to assist young and emerging businesses.
- When companies seek further rounds of funding (borrowings) to satisfy their financial obligations, they must first examine if they are prepared for debt traps.
- Though initial public offerings (IPOs) can be used to acquire cash, they give attention and legitimacy to companies. However, they must first determine their preparedness for IPOs.
- Governmental measures such as establishing a seed fund and awarding subsidies to businesses can be successful.
- Large, established firms should acquire and foster more startups.
Initial public offering:
- Initial public offering (IPO): The process of selling shares of a private business to the public in a fresh stock issuance is known as an initial public offering (IPO). The issue of public shares allows a firm to raise funds from the general public. Because it generally involves share premiums for current private investors, the transition from a private to a public business may be a crucial opportunity for private investors to completely realize benefits from their investment. In the meanwhile, it permits public investors to take part in the offering.
- Initial Public Offering (IPO) working procedure:
- Firm’s development: Prior to an IPO, a company is considered private. Early investors such as the founders, family, and friends, as well as professional investors such as venture capitalists and angel investors, have contributed to the firm’s development.
- When a firm believes it is ready for the rigors of SEC laws, as well as the benefits and responsibilities that come with being a public company, it will begin to promote its interest in doing so.
- Underwriting due diligence is used to price a company’s initial public offering (IPO) shares. When a company goes public, existing private shareholders’ shares are valued at the public market price, and new private shareholders’ shares are valued at the public market price.
- Advantages of an Initial Public Offering (IPO)
- Access to investment: To obtain cash, the firm has access to investment from the whole investing public, which makes takeover negotiations easier (share conversions).
- Acquisition target: It may also be easier to determine the worth of an acquisition target if the company’s stock is publicly traded.
- Increased openness, as a result of mandatory quarterly reporting, may typically assist a firm obtain better credit borrowing conditions than if it were a private company.
- Raise additional capital: Because it already has access to the public markets through the IPO, a public business can raise additional capital in the future through secondary offerings.
- Attract and retain stronger: Through liquid stock ownership participation, public firms may attract and retain stronger management and competent workers. During the IPO, many firms would reward CEOs or other workers with equity compensation.
- Profitability: IPOs may boost a company’s sales and profitability by lowering the cost of financing for both equity and debt. They can also increase the company’s exposure, reputation, and public image.
- Disadvantages of IPO:
- Unrelated to other business: An IPO is costly, and the costs of running a public company are continuous and sometimes unrelated to other business expenses.
- Publicly divulge secrets: Financial, accounting, tax, and other business information must be disclosed by the company. It may have to publicly divulge secrets and business techniques that might benefit competitors during these disclosures.
- There will be significant legal, financial, and marketing expenditures, many of which will be continuing.
- Management must devote more time, effort, and attention to reporting.
- If the market does not accept the IPO pricing, there is a danger that the needed cash will not be raised.
- Controlling corporate decisions: Due to new shareholders gaining voting rights and effectively controlling corporate decisions through the board of directors, there is a loss of control and increased agency issues.
- Legal or regulatory problems: There’s a higher chance of legal or regulatory problems, such as private securities class action lawsuits and shareholder actions.
- Fluctuations in a company’s share price: Management may be rewarded and assessed primarily on stock performance rather than genuine financial results, thus fluctuations in a company’s share price can be a distraction.
- Using excessive debt to buy back stock, for example, to inflate the value of a public company’s shares, might raise the firm’s risk and instability.
- Rigid leadership and governance: The board of directors’ rigid leadership and governance might make it more difficult to retain competent managers who are prepared to take risks.
Mains oriented question:
What are the issues confronting India’s startup ecosystem? Discuss. In this context, critically evaluate the efficacy of the government’s Start-up India plan initiatives. (250 words)