Mumbai: India’s capital market regulator is likely to exempt start-ups that plan to sell shares to the public through the proposed alternative capital-raising platform from the mandatory promoters’ holding lock-in period, facilitating easier fund-raising and investor exits.

The Securities and Exchange Board of India (Sebi), which proposed relaxing listing rules for start-ups in March, may also exempt all classes of stakeholders in start-ups from any lock-in clause while listing on exchanges, two people with direct knowledge of the matter said on condition of anonymity. Under the existing rules, a minimum promoters’ contribution (20% of post-issue capital) is locked in for three years from the date of commencement of commercial production or date of allotment in public issue, whichever is later.

The proposed listing rules and exemptions are aimed at making it easier for start-ups to access capital in India, which has become the world’s third largest base for such companies after the US and the UK. The exemption from the mandatory lock-in period for promoters’ holdings is likely to encourage several start-ups such as Flipkart and Snapdeal to raise money by selling shares in India.

“Sebi is likely to allow investors to hold and trade in shares of start-ups listed on the alternate capital-raising platform without any lock-in. This will allow many existing investors in start-ups to exit their holdings with ease and attract new investors without worrying about getting their investment locked in for a given period," said one of the two people cited above. “The final listing guidelines for start-ups will be announced next month."

Easier rules for initial public offerings will also provide early backers of start-ups an opportunity to sell their holdings.

“A number of companies in the start-up space have private equity, venture capital and angel investors as the main shareholders who are looking for opportunities to redeem their investments in the company," the first person cited above said. “Sebi wants to ensure that the growth of innovative businesses is not deterred. An exemption from lock-in will facilitate easier entry and exit of shareholders in start-ups."

In its consultation paper released on 30 March, Sebi had said that founding members of start-ups may not be in a position to offer the shares for lock-in.

“….many start-up companies that have flourished in recent times and several of which have also achieved scale have lower founding members’ holding (often less than 20%) and a large holding of institutional investors…such founding members do not have sufficient resources to acquire additional shares to offer for lock in…," Sebi said in the consultation paper.

The share lock-in clause is meant to ensure that the promoter remains committed to the company even after its listing and the small investors’ interest is protected.

Sebi’s proposals are aimed at allowing start-ups to raise money through the alternative capital-raising platform, said Prithvi Haldea, chairman and managing director of Prime Database, a primary market tracker and researcher.

“A lock-in on holding does not make much sense in case of start-ups because many existing investors are already locked in such ventures and are looking to exit. At the same time, if the existing investors exit the start-up, new investors will be required to support the growth of the start-up. So, a lock-in of capital should not be there in order to make new investors comfortable in funding the growth of start-ups," said Haldea.

India is home to nearly 3,000 start-ups, and the pace at which new businesses are being started has accelerated.

Sebi proposed that the alternative capital-raising platform will be a part of the existing institutional trading platform of stock exchanges, typically used for listing by small and medium enterprises.

Some experts say that several start-ups may not be comfortable to list their shares on the alternative platform as they prefer not to share their income details.

“The alternate capital-raising platform may not get too many start-up listings at this stage because they know the chances of finding sweeter funding deals could be higher if they talk to the potential investors privately," said Anand Lunia, founder-partner of Mumbai-based venture capital firm IndiaQuotient. “Promoters and founders of several start-ups are not comfortable to disclose their revenue and fund usage details to the public. This discomfort, coupled with a fear that if the stock plummets after listing, may hamper public perception and consequently sales may keep several start-ups away from using the listing platform proposed by Sebi."

According to Sebi’s proposal, start-ups wishing to use the special platform will also have easier disclosure norms. The regulator said that while filing the draft offer document with Sebi, such firms will only need to disclose broad objectives of a public issue rather than the granular details that are required of regular primary issuances.

Initially, only qualified institutional buyers and non-institutional investors will be allowed to invest in shares of start-ups that opt for listing, Sebi suggested.

To get listed on the proposed platform, a start-up will be required to raise at least 50 crore and allot shares to at least 500 investors while launching the issue. Sebi proposed that the start-up will need to remain listed on the institutional platform for at least a year before migrating to the main board of the stock exchange.

After listing, the minimum trading lot in shares of such start-ups on the institutional platform has to be of 5 lakh, Sebi has proposed.

Sebi had sought public comments on the proposals by 20 April.

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