Photo Designation Area Author Date
SEBI gives Indian Capital Markets its Start-ups Capital Markets Sanjay Israni | Partner
Prachi Doshi | Head of Department (DCM)
11 July, 2015

Hordes of consumers are moving online across India, leading to huge volumes of new startups flooding into the marketplace to service them. This space is growing rapidly and an ecosystem is emerging to help them grow and succeed. Indian e-Commerce is now receiving serious interest from wealthy bodies around the world and the world's most renowned investors have poured in big money to get a slice of the action in India, one of the fastest-growing markets for e-commerce. India has already recorded an investment of more than $2.36 billion in funding this year which is more than three times the figure for the first four months of 2014 ($716 million), VC investments have touched almost half the figure for the whole of 2014 ($4.78 billion). India, which is home to at least 3,100 start-ups, is ranked fifth globally in terms of the combined size of the start-up industry. It trails behind the US, Europe, Canada and China in this space.

Internet penetration in the country may not have crossed 16% of the population yet, but in absolute numbers this percentage works out to nearly 10 times the population of Australia. These findings provide a powerful indication of the potential of consumer growth to come in the near future.

There is no doubt that the startup scene will only become more advanced as very smart people are starting very smart things; and money will follow these smart things if economic mantras are to be believed.

Success is typically a combination of three things: opportunity, talent and capital. The Indian Capital Markets Regulator, the Securities and Exchange Board of India (SEBI) has decided to make capital available to Indian start-up companies by making new and easier regulations for potential start-up companies desiring to explore the capital markets for funds. SEBI has notified rules that make it relatively easier for start-ups to list in India, and for investors such as venture capital firms in such start-ups to sell their holdings through initial share sales. The rules, which have been in the works for a few months, are part of an effort to create a funding regime that reflects the booming entrepreneurial scene in the country.

One key issue that start-ups face is capital or funding and the relaxation of listing norms by SEBI will go a long way toward solving this issue. The availability of public money to support a scale up of operations at low costs and exit opportunity for angel or seed investors will increase liquidity in the system, which in turn will draw more investors toward India. Indian start-up companies will now be able not only to create value but also keep it in the country. SEBI’s move is aimed at preventing home-grown entrepreneurs from exploring offshore markets for raising capital and to make it easier for new business ideas to flourish within India. The objective is also to create new opportunities for equity investors to make money by betting on the prospects of new-age companies.

In order to give a boost to these start-ups, SEBI has relaxed its regulations for them to list and raise funds through a dedicated platform on domestic stock exchanges, i.e. the Institutional Trading Platform (ITP) of the exchanges, rather than they going overseas.

SEBI has made rules whereby hi-tech start-ups in areas such as analytics and biotech will be able to list in India on the Institutional Trading Platform (ITP) of exchanges with a minimum investment requirement of 10 lakhs. Though it is necessary that at least 25% of their pre-issue capital is held by qualified institutional buyers (QIBs), such as private equity and venture capital firms and non-banking financial companies. The minimum number of allottees in a public offer by a start-up shall be 200.

SEBI has provided that for the start-ups willing to list on this platform, there will be no cap on the usage of public issue proceeds for general corporate purposes. In conventional IPOs by companies opting to get listed on the main board of exchanges, not more than 25% of the capital raised can be used by a listing company for general corporate purposes.

As per the subsisting Regulations, there is a requirement of lock-in period of three years for (pre-IPO) shareholders holding more than 20% and one year for all other investors. However, in the case of start-ups, SEBI has notified the lock-in period to be only six (6) months for all categories of pre-IPO shareholders. On the special listing platform for start-ups, 75% of the shares would be reserved for such institutional investors. The remaining 25% will be available for non-institutional investors (NIIs). No person (individually or collectively with people acting in concert) in such a company will be allowed to hold more than 25% of the post-issue share capital in a start-up going public under this route.

SEBI has further gone to widen the definition of QIBs to include Non-Banking Financial Companies and family offices or trusts and other entities that register themselves as Alternative Investment Funds (AIF). In addition to the above, SEBI has also proposed that any investing entity registered with SEBI with a minimum net worth of 500 crore may also be considered as a QIB for investing in shares of start-ups.

SEBI has given a lot of leeway to the start-ups, in terms of pricing, disclosures and usage of funds, who are willing to get listed on the ITP, as the standard valuation parameters such as price to earnings, earnings per share and so on may not be relevant in case of many such companies.

Companies intending to list on the proposed ITP platform will be required to file draft offer documents with SEBI for observations, in line with the general practice. However, while filing the draft offer document with SEBI, such firms will only need to disclose broad objectives of a Public Issue as against the granular details required under the regular Public Issues.

A start-up getting listed on ITP will have the option to migrate to the main board of a stock exchange after three (3) years, subject to compliance with existing eligibility requirements of stock exchanges.

This new avenue of capital raising and the ITP is a welcome move which may now be exploited by Indian start-ups to attract capital from institutional investors and move to the next level in their business life cycle.

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