The market regulator is reworking its plans for a capital-raising platform targeted exclusively at start-ups after the concept failed to take off a year after it was proposed.

Now, the Securities and Exchange Board of India (Sebi) is considering sweeping changes to the listing framework for technology-focused start-ups that will allow them to trade publicly on regular stock exchange platforms, said two people familiar with the matter.

The changes could involve amendments to as many as 10 Sebi regulations, they said on condition of anonymity.

On 23 June 2015, Sebi unveiled a set of new rules that were supposed to make it easier for India’s 3,100-odd start-ups to list on an alternative listing platform. The response to the new rules was tepid; both start-ups and bankers were concerned about the ability of Indian investors to judge the value of early-stage companies, and worried about liquidity on the alternative trading platform.

Taking note of the concerns, Sebi’s primary market advisory committee (PMAC), in a meeting on 30 May, recommended that the regulator give up on the idea of an alternative listing platform, said one of the two persons cited above.

“Instead, the regulator could consider a relaxed listing framework. Under this proposed framework, technology-based companies, with less onerous listing requirements, could list directly on the main board of stock exchanges," the first person added.

An e-mail sent to Sebi on Wednesday did not elicit a response.

“The regulator is keen to make the changes; however it wants to ensure that such dispensations would yield results. Sebi has been informed that the market could see four-six listings in six months if the regulations are amended accordingly," said the second person.

Under the plan announced last year, Sebi allowed the exchanges’ institutional trading platform (ITP) to be used for capital raising by start-ups that are technology-intensive, focused on intellectual property, data analytics, biotechnology or nano-technology, and offer products, services or business platforms with substantial value addition.

According to the minutes of the PMAC meeting, a copy of which has been reviewed by Mint, start-ups may be allowed to list on the main stock exchange for an initial period of three years. For these three years, the Issue of Capital and Disclosure Requirements (ICDR), applicable to all listed companies, would not apply to the start-ups. Instead, start-ups will be required to comply with a diluted version of the listing guidelines, similar to those that were prescribed for the proposed start-up listing platform. At the end of the three-year period, these companies would need to become compliant with the ICDR guidelines.

“The whole idea of the proposal is to ensure listing for these new-age firms acts as a fund-raising platform with the option of a formal listing at a later stage. This could help them meet their initial funding needs with less onerous regulatory requirements," said the second person.

As part of the proposed rules, Sebi will also dilute some of the norms related to investors in public share sales by start-ups.

Under current rules, 75% of the public issue by a start-up needs to be allotted to qualified institutional buyers, while the minimum number of investors to whom shares have to be allotted has to be 200. Further, Sebi rules allowed only two categories of investors—institutional investors (with net worth of more than 500 crore) and non-institutional investors other than retail individual investors to invest in start-up listings. Sebi also mandated a minimum application size of 10 lakh. The minimum trading lot post-listing cannot be less than 10 lakh, Sebi had said.

These regulations were proving to be a hindrance, said the first person cited above.

“The panel has suggested that the minimum number of allottees should be reduced from the current 200 to 50. Instead of 75%, 50% of the issue size should be allotted to QIBs. The minimum trading lot should be reduced to 5 lakh in first year post-listing, thereafter making it 1 lakh," said the second person.

Harish H.V., a partner at Grant Thornton India Llp, said some of the proposed changes will make it easier for firms to list, but added that other provisions may still prove to be a hurdle. “Suggestions such as the one on the trading lot size were a demand of the industry, as it makes it easier for the investors to exit. Reducing the minimum allottees and QIB criteria will all reduce the hurdles faced by the companies who are looking at listing as a way to raise funds," Harish said.

“...the whole idea of ITP was to make it easy to identify the firms that are making fewer disclosures and have less onerous regulations. Allowing them to list on main board may pose a challenge for investors to identify such companies," said Harish, adding that a clause requiring delisting after three years if the firm fails to meet ICDR guidelines could also hurt investors.

Ajith Mohan, founder of furniture e-commerce company Furlenco, said start-ups wouldn’t mind listing and raising funds, but the compliance and disclosure requirements for the listing process were too high. “It is very difficult for the start-up to give growth projections and have shareholder meetings like other listed mature companies, because business models and projections in start-ups change very quickly."

However, if investors were made aware of the amount of risk and start-ups were not made liable for returns, they may consider listing, he added.

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