What Mumbai Can Learn From New York

India should lower entry barriers for companies wishing to float IPOs. SEBI should be more like SEC

- Arvind Panagariya and Rajeev Mantri

Equity capital markets sector was among the early beneficiaries of the economic reforms launched in 1991. As a result, today, India has a vibrant equity market. Recently, the market capitalisation of companies traded on Bombay Stock Exchange crossed the $3 trillion mark, making it the eighth largest stock market by market capitalisation in the world.

In recent years, private equity funds have emerged as a critical provider of early-stage and growth-stage capital to businesses across industries. While this trend can be observed worldwide, dominance of private equity has had a longer history in India. While there are likely multiple factors behind this phenomenon, an important one is the rather tight regulation of public equity markets.

Securities and Exchange Board of India (SEBI) leans heavily in favour of de-risking retail equity investors in public markets by erecting high barriers to the entry of new companies into public-capital market. But the fallout from such an approach is the stifling of growth of public equity via initial public offerings (IPOs).

SEBI has relatively tough eligibility criteria for companies wishing to float an IPO. For example, it requires them to have tangible assets of at least Rs 3 crore. The regulator also requires them to exhibit average operating profits of Rs 15 crore in the preceding three years with no operating losses in any one of those years. A further requirement is net worth of Rs 1 crore in each of the three preceding years.