Spotify's direct listing plan could be a cue for India Inc

Spotify's plan to list directly on the New York Stock Exchange, bypassing the conventional way of going public - an initial public offer (IPO) - could prompt the capital markregulator and companies in India to sit up and take notice.
 
In a direct listing, existing shareholders of companies sell shares on the stock exchanges without going through the detailed procedural requirement of an IPO. This is cheaper and less cumbersome for companies, who save on investment banking fees.
 
"Direct listing has several positives. It will lead to a more transparent market, minimum intermediation, lower costs, and better price discovery. Procedures are at a minimum and listing is quick," said Sandeep Parekh, founder, Finsec Law Advisor and a former executive director of the Securities and Exchange Board of India (Sebi).
 
The concept of direct listing is not entirely alien here. It is not allowed on the main bourses, the BSE and the NSE, but institutional trading platform or ITP selectively permits direct listing. Sebi had introduced the ITP, a stock-exchange window meant for small and medium enterprises which did not meet the requirements of listing on the main board.
 
Companies in India are allowed to go for direct listing only under two circumstances. One, when a company is demerged; and two, when a company wants to provide an exit to its existing private equity investors.
 
But, providing an exit to PEs can only be on the institutional trading platform or ITP. Otherwise, companies planning to list have to follow Sebi guidelines on initial public offering, such as appointing an investment banker and issuing an offer document.
 
"The idea of ITP was to give an exit to angel and private-equity investors. But this platform did not take off because of the stringent regulations, and most Indian start-ups and SMEs wanted to raise funds instead of going ahead with a direct list- ing," said a senior ex- change official who did not want to be named.
 
The regulator has allowed only institutional investors and high- net-worth individuals to trade in this alternative trading platform. So far, only 20 firms have tapped the institutional trading platform .
 
If Spotify's attempt to list directly is a success, Sebi could take a cue from it and replicate the model here.
 
"Regulators will keenly watch this listing and if it is suc- cessful, Sebi may replicate this process in India, especially for start- ups," said Huzefa Nasikwala, securities lawyer and founder of Nasikwala Law Office. "Sebi intro- duced a similar concept a few years ago, but it did not take off due to several reasons."
 
Parekh said, "How this trend catches on depends on how much innovation Sebi would permit and whether companies want to push for regulatory innovation."
The other major hindrance to direct listing is that many companies - especially start-ups and small and medium enterprises - want to raise money through IPOs. A direct listing of the kind Spotify is doing only gives existing investors an exit.
 
Spotify chose the direct listing route to save costs and avoid lockin periods for its key shareholders. It appointed three bankers - Goldman Sachs Group Inc., Morgan Stanley and Allen & Co. - for a $30-million fee to help with the direct listing process. Still, this is cheaper than what it would have paid them for an IPO.
 
Traditionally, bankers charge 3-5% for an initial public offering (IPO) to promote the company through road-shows, create demand for the securities, and help establish a fair price. Last year, Alibaba paid more than $300 million to its bankers.
 
Spotify's successful listing could also encourage Indian companies to opt for direct listing abroad. A panel headed by MS Sahoo, a former Sebi member, had recommended that Indian companies should be allowed to directly list abroad. However, not many companies have explored that route due to taxation and operational issues, lawyers said.
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