Start-ups entering listed space via reverse merger

Mumbai: Start-ups are entering the public space by acquiring listed companies and going for reverse merger to enhance their profile. Lately, a few financial services start-ups have acquired companies listed on the BSE and revamped their boards and management teams. They are now in the process of creating specialised technology-enabled lending platforms to boost credit growth in the SME space.

According to industry watchers, listed start-ups have emerged as potential wealth creation opportunities for a broader pool of investors, including high net worth individuals (HNIs), private equity funds and retail investors at a time when India’s start-up environment is growing at an incredible pace.

For instance, U GRO and Nyogin Fintech—two early stage listed lending start-ups, have recently raised funds from a larger spectrum of marquee investors, signalling the unfolding of an eco-system to raise growth capital.

Both these companies acquired listed vehicles on the BSE and revamped the management.

“The wealth creation opportunity through private equity or direct investment route has been restricted to HNIs and family offices. The broader retail market has not been able to tap into this opportunity. Listed start-ups provide access to large capital pool. And a listed entity creates an environment to build an institutional platform compared to a private equity-backed unlisted company, which has shorter time horizons,” said Shachindra Nath,  Executive Chairman, U GRO.

Nath, a financial services veteran, launched U GRO last year after acquiring listed entity Chokhani Securities. U GRO raised Rs 953 crore from investors, including New Quest, ADV Partners and PAG Asia and family offices.

Similarly, Information Interface India Private Ltd acquired M3 Global Finance and changed the name to Niyogin Fintech Ltd. Founded by Amit Rajpal and Gaurav Patankar, the company raised Rs 250 crore from Ward Ferry.

These lenders are following the path of a lending unicorn-Capital First, which adopted a similar strategy. In 2012, venturing down the entrepreneurial road, V Vaidyanathan acquired a stake in an existing NBFC and secured the equity backing of Rs 810 crore from Warburg Pincus and thus founded Capital First Ltd. Since then, Capital First has been transformed from a wholesale SME lender into a bank.

Experts feel that listed vehicle makes sense for NBFCs for a variety of reasons. “From an NBFC perspective, a listed vehicle provides such companies with access to permanent capital. Early investors in the company can exit their investments by selling their stakes on the exchange,” said Mahesh Singhi, MD, Singhi Advisors, an investment banker.

Lending is a long-haul business. A listed vehicle ensures that a private equity with supernormal rights (which is not permitted by Sebi) cannot exert undue pressure on the management team to maximise returns in the short-term by taking unwarranted risks to provide them an exit–a challenge often faced by private lenders, said another financial services industry expert.

It is because of these reasons that the Reserve Bank has made it compulsory for banks and small finance banks above a given size to list within a three-year time-frame.