India’s stock exchange lures VCs

Venture capitalists invested $1.7 billion in 125 Indian companies in 2006, up more than 50% from the $1.1 billion invested in 70 companies the year before, according to data from Thomson Financial (publisher of PE Week).

The investment boom seems to stem from regulations governing the exit environment. The big change over the last two years has been in the performance of the region’s stock exchanges.

The Bombay Stock Exchange Sensex, India’s version of the Dow Jones Industrial Average, closed at more than 14,000 recently, its highest level ever and double its 2000 peak. The market has been doing well thanks to optimistic third-quarter earnings expectations. It’s also gotten a boost from pundits who predict higher levels of foreign investment in India this year. The Sensex index shot up more than 46% in 2006, compared to the 16% rise in the Dow Jones during the same year.

Indeed, the strength of the Sensex is causing more companies to consider listing there since it’s relatively easy for an Indian company to go public on the exchange. The minimum market capitalization requirement is a little more than $1.1 million with annual revenue of more than $600,000.

But foreign companies have a much tougher time getting a listing than an Indian-based company. The Sensex requires foreign companies to average $500 million in revenue for the three years prior to offering, five years of profitability and that 10% of a company’s profit be paid out in dividends each year, according to Fenwick & West. VCs and entrepreneurs are responding to this by locating their startups in India, the law firm says. —Alexander Haislip