Indian startups’ US IPO listing presents both opportunities and challenges

While the GIFT International Financial Services Centre (IFSC) emerges as a potential alternative for Indian tech startups, the relative attractiveness of US listings remains a complex consideration. Despite cost advantages, the IFSC is still in its infancy, with a smaller and less diverse investor base. Newly listed companies may face challenges in trading volumes and liquidity as it currently caters only to institutional investors compared to established US exchanges, which cater to both institutional and retail investors.

Furthermore, the evolving landscape of IFSC, having only allowed direct listings since January 2024, adds an element of uncertainty to its long-term viability as a substitute for US listings. The ability of IFSC to establish itself as a competitive and robust financial centre will significantly influence its appeal to Indian companies considering global listings.

Key Challenges

First and foremost, adherence to the Sarbanes-Oxley Act (SOX) is essential, requiring foreign companies to meet stringent standards in internal controls, financial reporting, and audit committees. Additionally, conformity with US Generally Accepted Accounting Principles (GAAP) necessitates a thorough reconciliation of financial statements.

Bridging the legal and regulatory gap between Indian and US systems is crucial, demanding a comprehensive understanding of US securities laws and disclosure requirements. Corporate governance practices must align with US standards, demanding transparency and comprehensive reporting on operations, risks, and financial performance.

Moreover, the commitment to adhering to the Foreign Corrupt Practices Act (FCPA) becomes essential, necessitating the implementation of robust anti-corruption policies.

Successful navigation of these challenges necessitates careful planning, collaboration with legal and financial experts, and a commitment to transparency and compliance with US regulatory standards. This adds to the cost and complexity, particularly for smaller companies with limited resources.

ESG Considerations As A Differentiator

Beyond regulatory hurdles, US investors emphasise sustainability and responsible business practices. Thus, aligning with globally recognised Environmental, Social, and Governance (ESG) frameworks enhances a company's credibility and may contribute to a positive corporate image. Integrating ESG considerations into a company's strategy not only attracts investors who prioritise such values but can also positively impact valuation.

Companies seeking US listing must demonstrate a strong commitment to sustainability and responsible business practices. Many U.S. investors and exchanges follow globally recognised ESG frameworks, such as those developed by the Sustainability Accounting Standards Board (SASB) and the Task Force on Climate-related Financial Disclosures (TCFD).

Aligning with these standards enhances a company's credibility in international markets, particularly the US markets, where ESG considerations have become integral to investment decisions. While financial performance and growth prospects remain crucial for a successful IPO, integrating ESG considerations into a company's strategy and operations can enhance its appeal to U.S. investors and contribute to a smoother listing process.

Dealing With The Challenges Of US Listing

US financial institutions and investment bankers can play a crucial role in helping foreign/Indian companies navigate the complexities of listing on US stock exchanges. Offering expertise and experience, they conduct due diligence and assist in strategic decision-making. They can also provide legal and accounting support to ensure that all regulatory filings are accurate, complete, and in line with U.S. standards. They can assist foreign companies in assessing the risks associated with the offering, determining the optimal structure, and setting the offering price. They can provide strategic advice on various aspects of the IPO, including timing, market conditions, and structuring the offering. They help companies prepare for the complex listing process and navigate challenges in the way.

Their role extends to building relationships with US institutional investors, analysts and other key stakeholders. This is crucial for generating interest in the IPO and maintaining positive relations post-listing. They can assist in developing effective communication strategies to convey the company's story, business model, and growth prospects to the U.S. investment community.

To conclude, the journey of Indian companies seeking to list on US stock exchanges is a nuanced exploration of opportunities and challenges. While the allure of global capital markets remains strong, companies must carefully navigate regulatory landscapes, align with international standards, and embrace ESG considerations to thrive in the dynamic environment of US listings.

With the right support and strategic planning, Indian companies can successfully make their mark on the global financial stage. As the landscape evolves, the choices between US exchanges and emerging alternatives like IFSC will be pivotal in shaping the future of Indian IPOs on the international stage. Balancing ambition with adaptability and leveraging the expertise of financial institutions will be key to navigating this intricate path towards global market access.

Ritesh Kumar Singh is a business economist and CEO, Indonomics Consulting Private Limited, a policy research and advisory startup. He tweets @RiteshEconomist. Views are personal, and do not represent the stand of this publication.