Daybreak - Shark Tank India is inspiring retail investors to pour in crores on risky investments

Episode Date: March 20, 2023

Last week, Season 2 of one of the country’s most popular reality TV shows, Shark Tank India, came to an end. The show has given rise to a significant demand for startup investing.Investors are able to put in as little as Rs 5000 via online fundraising platforms like Tyke Invest and Infubiz. They offer investments in startups through Community Subscription Offer Plans. But these fundraising campaigns are not subject to securities laws and  investors in these instruments do not have any shareholder rights under the Companies Act, 2013.This is creating a high-risk environment for small-time retail investors.Tune in.

Hi, this is Rohan Dharma Kumar. If you've heard any of the Ken's podcasts, you've probably heard me, my interruptions, my analogies, and my contrarian takes on most topics. And you might rightly be wondering why am I interrupting this episode too. It's for a special announcement. For the last few months, I and Sita Raman Ganeshan, my colleague and the Ken's deputy editor, have been working on an ambitious new podcast. It's called Intermission.

We want to tell the same. secret sauce stories of India's greatest companies. Stories of how they were born, how they fought to survive, how they build their organizations and culture, how they managed to innovate and thrive over decades, and most importantly, how they're poised today. To do that, Sita and I have been reading books, poring over reports, going through financial statements, digging up archives, and talking to dozens of people. And if that wasn't enough, we also decided to throw in video into.

to the mix. Yes, you heard that right. Intermission has also had to find its footing in the world of multi-camera shoots in professional studios, laborious editing, and extensive post-production. Sita and I are still reeling from the intensity of our first studio recording. Intermission launches on March 23rd. To get an alert, as soon as we release our first episode, please follow Intermission on Spotify and Apple Podcast. or subscribe to the Ken's YouTube channel. You can find all of the links at the ken.com slash I am. With that, back to your episode.

Last week, season two of one of the country's most popular reality television shows came to an end. That shark tank India has hit such a chord amongst viewers is not really surprising. India, after all, is among the world's largest startup ecosystems. The basic format of the show is that small business, owners enter as contestants and they pitch their businesses to investors who are some of the most successful startup founders in the country. They call them sharks. For the audience, the show is a dramatic glimpse into how India is innovating, transforming and growing. We are a country high on aspirations and we love these kind of feel-good stories and of course we love drama. Plus, to an extent,

the show has also kind of demystified the world of business and investments for many people. New York Times contributor Jamie Lowe described this really well in an article a few years ago. She became a fan of the show and she says that after watching a couple of episodes, you feel like you can write your own business plan. If you watch enough episodes, you begin to notice a pattern. You see how people pitch their ideas over and over again using all kinds of unique and sometimes not so unique ways. After a point, you as a viewer, develop a sense of superiority, like you know everything.

Lowe describes it perfectly. She says, I can play couch shock just as easily as I can play couch entrepreneur. In India, the show has given rise to a demand for startup investing. More and more people want to invest in promising startups. A new ecosystem has emerged. It is a heady combination of glamorous marketing and feeling. good storytelling. And a host of online platforms like Tyke Invest and InfoBiss have come up. They aggregate and attract retail investors into fundraising campaigns. In fact, they even have shows similar to

Shark Tank for credibility and publicity. People can invest as little as 5,000 or 10,000 rupees. But these campaigns only look like a public offer under the company law. Tyke and newer platforms like InfoBiz offer investments in startups through the community subscription offer plans or CSOPs. But investors in these instruments do not become shareholders in the startup. They do not have any shareholder rights under the Company's Act of 2013. And yet, thousands are putting their money into these offers. These online platforms are beginning to look a lot like the stock exchanges, but with lesser regulatory barriers and costs,

quite similar to a shadow IPO. The number of such offers is growing substantially. And according to Tashar Talwar, a contributing writer, the Ken, it is creating a very high-risk, wild-west kind of an environment for small-time investors who are often unaware of the important details. Welcome to Daybreak, a business podcast from the Ken. I'm your host, Nidda Sharma, and I Don't Chase the News Cycle. Instead, thrice a week on Mondays, Wednesdays and Fridays,

I will come to you with one business story that is worth understanding and worth your time. Today is Monday the 20th of March. To understand what is really going on, let us look at Tyke Invest. Tyke markets itself as a platform for exclusive investment opportunities. It is headquartered in Mumbai and it claims to have over 150,000 registered subscribers. It lists the details of 120 closed fundraisers on its platform. Some of them boasts of thousands of subscribers. And going by the value and subscribers, many of Tyke's biggest campaigns were by startups featured

on Shock Tank India. And many active fundraisers are by companies featured in season two of the show. The platform was also advertised during the first few episodes. Out of the 120 closed fundraisers, 14 managed to collect more than one crore rupees. This was between last year and this year itself. In fact, if you have watched enough Shark Tank, you might even be able to recognize many of the names on Tykes list. To Shir got a hold of a sample agreement on Tyke. According to it, the community subscription plan is not a security under the company's Act of 2013.

Instead, it is an incentive-based scheme designed by the company to reward its community evangelizers. Now, there is nothing wrong with growing the customer base through forming a community. But once access is sold as a subscription to the community, that is when things become a bit hairy. Because at its core, this is a speculative contract riding on the company's share valuation. And how is that? Stay tuned to find out. This part gets a bit technical, but stay with me because it is essential to understand how Shark Tank is leading to this wave of risky investments by retail small-time investors. In India, we have the Securities Contract Regulation Act of 1956, also known as the SCRA.

It is a law meant to prevent undesirable transactions in securities. A security, by the way, is like a certificate that has monetary value and can be traded. They are usually classified either as equity securities such as stocks or debt securities such as bonds and debentures. Under this law, contracts which specular, on the change in valuation of underlying securities are called derivatives. According to the SCRA, a derivative is a subset of a security. It is defined as any contract which derives its values from the prices of underlying securities. The infamously risky futures and options trading, two, are derivatives.

But derivatives, unless traded on the stock exchanges, are prohibited by law in India. And these campaigns by platforms like Tyke and Infobis resemble a public offer under a company. They raise low ticket funds from retail investors through a community subscription plan. But in reality, they are actually non-equity instruments with an underlying speculatory bet on the company's future evaluation. Under the securities law, these contracts are quite similar to derivative products, which like I said are prohibited. According to Tyke's community subscription document, the arrangement with the investor is essentially a stock appreciation right or SAR. And the investment returns are based on a formula that promises to pay the subscriber

the difference between today's equity valuation and a future higher equity valuation, which is why the SAR is a derivative contract under the law. Essentially, it is a speculative bet on the company's share valuation. And that is what makes it risky, especially for small-time investors. Online platforms have started to resemble the stock exchanges, but with lesser regulatory barriers and costs, quite similar to a shadow IQ. But Tyke actually has a disclaimer on its website,

and it says that it is not a regulated stock exchange and does not intend to become one, and that it is not authorized to solicit investments. But though a disclaimer acts as a warning to investors and protects the platform, the actual nature of what Tyke is doing should be looked into by the country's regulator Seby. When Tashar sent Sebi a bunch of questions regarding this,

they went unanswered. So what will happen if more and more shows like Shock Tank India come up? I will tell you in the next segment. Shows like Shock Tank are the perfect platforms for startups to reach a wider audience. For example, the 10-Minute Million, which is a startup fundraising event by IIT Bombay. It capitalizes on Shark Tank's popularity by showcasing short snippets from the show. And a new iteration of it is supposedly going to live stream on GeoTV.

While most shows and campaigns on fundraising platforms have relatively small sizes from 10 lakh rupees to 2 crore rupees per campaign, if more and more retail investors start flocking to such platforms and investments, Sebi may finally have to take notice. Like Tashar says, with the proliferation of sharks, the Coast Guard needs to get active. Daybreak is produced from the newsroom of the Ken, India's first subscriber-focused business news platform. What you're listening to is just a small sample of our subscriber-only offerings. A full subscription unlocks daily long-form feature stories, newsletters, subscriber-only apps and podcast extras.

Head to the Ken.com and click on the red subscribe button on the top of the website. I am Snigda Sharma, your host and today's episode was edited by my colleague Rajiv Sien.