NSE MD Ashish Chauhan recently encouraged startups and MSMEs to consider public listing as a way to raise capital and enhance credibility. While listing offers founders a path to expansion without losing control, investors must weigh these potential benefits against the risks of high valuations and the strict regulatory compliance requirements that follow for smaller firms.
What Happened
Ashish Chauhan, Managing Director and CEO of the National Stock Exchange (NSE), has publicly encouraged startups and micro, small, and medium enterprises (MSMEs) to view the stock market as a viable growth engine. Speaking at the JITO Incubation and Innovation Foundation (JIIF) event, he emphasized that going public is an effective way to raise capital, improve corporate governance, and gain credibility without founders having to give up control of their companies.
The Strategic Argument for Founders
The core of the message focused on the long-term benefits of listing for business owners. Chauhan noted that founders typically retain 75% of the equity, while offering 25% to the public, allowing them to maintain authority. He highlighted that being a listed entity creates a unique 'currency' for the company, which can be used to acquire other businesses, attract strategic partners, or implement employee stock option plans (ESOPs) to retain talent.
From a founder's perspective, the public market often provides higher valuations compared to private funding rounds. He suggested that businesses with stable profits could potentially unlock significantly higher valuations on the exchange, providing more flexibility for future expansion.
Why Investors Must Exercise Caution
While the prospect of a company accessing public markets is positive for growth, investors need to view these developments through a critical lens. A public listing brings immediate changes to a business. Once a company lists, it becomes subject to strict regulatory oversight, including quarterly financial disclosures, transparency in operations, and higher compliance costs.
For investors, the primary concern in the SME and startup listing space has often been the disconnect between market valuation and underlying financial fundamentals. While founders look for growth capital, investors must assess whether the asking price of an IPO aligns with the company’s current profit margins, debt levels, and long-term business model.
The Regulatory Environment
It is worth noting that regulators, including the Securities and Exchange Board of India (SEBI), have been increasing their scrutiny of SME IPOs. This is because some companies have seen significant stock price volatility and valuation spikes that were not always supported by operational performance. As a result, investors are increasingly advised to look beyond the hype of a new listing. The regulator's focus on transparency means that any lapse in reporting or governance can lead to strict warnings or investigations, which can directly affect investor confidence.
What Investors Should Track
When startups or MSMEs approach the public market, investors should focus on the following:
- Financial Quality: Look at the profit margins and cash flow, not just revenue growth. A business that is profitable is better positioned to handle the costs of being a listed entity.
- Governance Track Record: Evaluate the promoter’s history. Transparency in previous private dealings is a strong indicator of how they will manage public money.
- Use of Proceeds: Read the Red Herring Prospectus (RHP) carefully to understand exactly how the money raised in the IPO will be spent. Is it for genuine expansion, or to pay off existing debt?
- Regulatory Updates: Keep an eye on any warnings or observations from exchange regulators, as these can signal potential governance issues within the company.