The capital market regulator, SEBI has followed upon its March discussion paper and announced guidelines that should make capital market access easier for start-ups and new age companies.
As the SEBI chairman pointed out there has been a felt need on the part of the new age companies for a more liberal capital market listing regime than what obtains for most other companies seeking listing on the domestic exchanges. That should also give an easier exit option for venture capital and others who have invested in the start-ups. Consequently there will be increased liquidity in the system.
The broad objectives outlined by SEBI are to create an enabling environment for the start-ups to flourish in India instead of depending on overseas exchanges as some of the more visibly successful ones have proposed. An offshore listing confers a lot of advantages, chiefly an opportunity to operate under a liberal capital market regime and access to a huge reservoir of capital.
It has been claimed that the new rules are part of an effort to create a domestic funding regime that reflects the thriving entrepreneurial scene in the country.
The guidelines closely follow the points raised in the discussion paper. Hi-tech start-ups in areas such as analytics and biotech can list in India on the Institutional trading platform (ITP) of exchanges, if at least 25 per cent 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 (NBFCs). Other start-ups can also seek listing in the platform provided 50 per cent of their pre-issue capital is held by QIBs.
Significant relaxations
An important relaxation in the normal IPO rules relates to the use of funds raised. Start-ups listing on this platform will not face any restriction on the use of funds raised through public issues for general corporate purposes. For more conventional issuers of capital listing on the main boards of exchanges, not more than 25 per cent of the capital raised can be used for general corporate purposes.
Further, the existing three year lock-in period for many categories of pre-issue shareholders has been relaxed.
SEBI has now said that for start-ups the lock-in period will be for only six months for all categories of pre-issue shareholders.
75 per cent of the shares listed on the institutional trading platform will be available for institutional investors with only the balance 25 per cent available for non-institutional investors. The minimum transaction size will be Rs.10 lakh, both at the time of initial offer and subsequent trading. This is clearly meant to keep out the relatively small investors. The logic is that the relatively better off investors will be able to assess the risks in what undoubtedly will be a new experience both for investors as well as regulators.
In another important stipulation, the guidelines specify that no person individually or acting in concert will be allowed to hold more than 25 per cent of the post-issue capital of the start-up.
The definition of QIBs has been extended to cover NBFCs, family trusts and other entities that register themselves as alternative investment funds.
Whither disclosure ?
The disclosure requirements so integral to an IPO has been diluted for the public issues of these start-ups. Over the years the SEBI has invested heavily sprucing up disclosure requirements, which by many yardsticks have come to be regarded as the bedrock of capital market regulation as applicable to primary market. The company will still file the prospectus but the offer document will reflect the new liberalisation.
This and the stipulation to restrict the issue to the well heeled investors are the most significant reversals of recent capital market regulation.
The question is whether the 3,000 plus estimated start-ups will be enthused by the relaxation. It has been pointed that there are other factors that would influence a listing. For instance, a listing on Nasdaq or Singapore might by themselves enhance the business prospects of the listing company.
Secondly, should the regulator change track so significantly and whether the price of this liberalisation can be more than met through increased activity among start-ups .
Finally, laymen especially but regulators too might be flummoxed by the nature of business the tech start-ups are engaged in. The prospectus — even if one cares to read — will be a poor guide and because of the diluted disclosure requirements very little will be known about promoters.
crl.narasimhan.thehindu@gmail.com
