Photo: Mint
Photo: Mint

Crowdfunding may get easier for start-ups in India

Regulator may relax provision on number of accredited investors who can participate in crowdfunding exercise

Mumbai: India’s stock market regulator is considering relaxing a key provision of its plan to create a crowdfunding platform for small enterprises, as it pursues efforts to create a fund-raising regime that reflects the thriving entrepreneurial activity in the country.

The provision concerns the number of accredited investors who can participate in the crowdfunding exercise, currently limited at 200.

In late March, Reuters first reported that the Securities and Exchange Board of India (Sebi) was considering an alternative investment platform, aimed at encouraging some of India’s hot Internet start-ups to list at home by relaxing some key requirements.

In April, the regulator proposed allowing venture capital funds to invest up to 25% of their funds in foreign companies with an Indian connection, a move that experts said would benefit many Indian start-ups that are now being incorporated outside the country, with back offices and development and delivery centres usually being housed within the country.

“Sebi is recognising a change in the market scenario," Prithvi Haldea, chairman of Prime Database that tracks primary capital markets, told Reuters in March.

Last June, Sebi put out proposed rules on crowdfunding but limited the number of investors from whom start-ups and small companies could raise money at 200, in keeping with India’s new companies law that limits the number of investors who can be involved in a private placement exercise at that number.

Crowdfunding is the process of raising funds from multiple investors through a web-based platform or social networking site for a specific project, business venture or social cause.

Sebi’s proposal was an attempt to solve the funding problems of start-ups and small companies. However, by sticking to the framework of the new companies law, the regulator limited the number of investors and also prohibited the companies from publicizing their efforts through ads on other media channels. The two restrictions didn’t go down well with companies, said a person familiar with the matter who asked not to be identified.

Sebi is now considering an exemption to these rules for start-ups with the corporate affairs ministry, said a second person familiar with the matter who too asked not to be identified. “The exemption will make the norms similar to those followed in the US for crowdfunding."

The two persons said that the new crowdfunding norms could be similar to the recently amended Jumpstart Our Business Startups Act, 2012, or JOBS Act, of the US, which allows companies to publicly advertise and market their investment opportunities, of whatever size, to accredited investors, including through the Internet or social media, as well as through print, radio or television.

“The new companies act has several clauses that make business tougher for companies, especially in the unlisted space," Rajiv Dadlani, a member of Mumbai Angels, a group of angel investors that invest in early- and mid-stage companies, said. “There is an exuberance in the start-up deal space and if these clauses of the companies act are relaxed, a more vibrant start-up ecosystem can be created."

Following the success stories of e-commerce websites and small businesses based on innovative models in the start-up space, Sebi started engaging with a number of stakeholders to understand how it could help small businesses grow faster and access early-stage funding.

Following a series of meetings with start-ups and merchant bankers, on 30 March, Sebi proposed in a discussion paper an easier set of rules to allow local start-ups such as software product development firms and e-commerce ventures to raise capital through listing on stock exchanges.

If implemented, the proposals will improve access to funding for such firms and give them an alternative to offshore listings. India is home to nearly 3,000 start-ups.

In the discussion paper, Sebi proposed that start-ups list on an alternative capital raising platforms of Indian stock exchanges with easier compliance norms.

This platform would be part of the existing institutional trading platform, typically used for listing by small and medium enterprises.

According to Sebi, “new-age companies" having an innovative business model and belonging to the knowledge-based technology sector, where no person (individually or collectively with persons acting in concert) holds 25% or more of the pre-issue share capital, may access capital through the institutional platform.

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