Don't read too much into Paytm IPO disaster

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Paytm

Highlights

New age internet businesses are queuing up before Sebi to go public. Some already have a successful listing. Companies like Zomato, Nykaa, Policybazaar, Paytm have made their debuts on exchanges.

New age internet businesses are queuing up before Sebi to go public. Some already have a successful listing. Companies like Zomato, Nykaa, Policybazaar, Paytm have made their debuts on exchanges. After shares of these startups started trading, the most important issue of price of these scrips have come to the fore.

While Zomato, Nykaa, PB Fintech (parent entity of Policybazaar) got listed at a premium to their IPO prices, India's largest IPO Paytm got listed on a price lower than the IPO price. And this became the talk of the town. Post listing, the share price of Paytm has fallen around 30 per cent from the IPO price. This has led to a raging debate over the valuation of these new internet startups most of which are loss-making.

Firstly, the subdued debut of Paytm on exchanges highlights the greed of many investors who have assumed subscribing to an IPO as a lottery ticket. You get subscription of the IPO and sell on the listing day with a gain. Such approach to any IPO can spell disaster as seen in case of Paytm. Without reading the draft prospectus and knowledge of the business model, it is not desirable to take position on any IPO. The world knows that the business model of startups focus more on revenue generation on initial years.

It works on the premise that once higher number of consumers start using their products or services, startups can make money by raising the prices apart from cross-selling various other services. For now, the Gross Merchandise Value (GMV) remains the main stay for the purpose of valuation. Any investors who take position on these startups should be aware of the fact that profits may remain elusive for long time to come. Against this backdrop, crying hoarse over the fall in listing prices of any startup will solve no purpose.

Some sections of analysts are of the opinion that the market regulator Sebi shouldn't give approval to such listing proposals. In May this year, Sebi came up with a slew of relaxations concerning listing norms of startups. These norms are working as the immediate trigger for the IPO frenzy seen among these new-age companies. The regulations have reduced the holding period for pre-issue capital along with allowing discretionary allotment to eligible investors. At a time when startup ecosystem is growing, it is critical to provide financial support to these companies for the overall growth of the economy.

That is the premise behind the regulator's relaxation of norms. Currently, the sales growth of many unicorns (startups with a valuation of more than one billion dollar) is growing at a CAGR of more than 20 per cent. When the revenue grows at such pace, these companies are aggressively adding people on their payrolls.

As per industry body Nasscom, startups created around 60,000 direct jobs in 2019 (pre-pandemic year). If the indirect job creation is estimated, it will be at least three times of this number. So, startups are the only hopes of Indian economy to absorb the youth into gainful employment. Therefore, the debate and discussions around any startup listing going bad or other getting listed on premium are irrelevant. India needs a vibrant startup ecosystem and only those investors, who understand the risks and rewards associated with startups' business model, should take positions on listed startups.

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