Mumbai: India’s capital market regulator has proposed an easier set of rules that would 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.

The Securities and Exchange Board of India (Sebi) on Monday released a discussion paper putting forward the proposal after a series of meetings with start-ups and merchant bankers. India is home to nearly 3,000 start-ups, and the pace at which they are coming up has accelerated.

In the discussion paper released on Monday, Sebi proposed that start-ups list on an alternative capital raising platform 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.

“…considering the unique nature of such companies, they seek differential treatment. If the capital raising process in India is not made further relaxed for such issuers, they may be driven to list on stock exchanges outside India…," said Sebi, explaining the need for a special set of rules for start-ups.

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.

Sebi also proposed easier disclosure norms for start-up listings. 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.

“This business is a completely different model. Their goal is to grow big, which results in losses. Some of these companies are already much larger than brick-and-mortar companies. This is a welcome move because a lot of these companies are going to the US for listing. The problem is that Indian laws only allow a company to be listed after showing three years of profit," said Nishchal Joshipura, partner at Nishith Desai Associates, a law firm.

In the discussion paper, Sebi acknowledges that a number of these firms may be loss-making at the time of listing.

Only two types of investors—qualified institutional buyers (QIBs) and non-institutional investors (NIIs)—will be allowed to invest in shares of start-ups that opt for listing, Sebi suggested.

However, the definition of QIBs would be widened to include systematically important non-banking financial companies and family offices/trusts that register themselves as alternative investment funds.

Sebi proposed that any other 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.

“While QIBs will be entitled for at least 75% of the shares of the start-up, the balance will be held by NIIs," said the discussion paper, adding that no QIB can be allotted more than 5% of the issue size. The minimum application size in case of such issues will be 10 lakh.

Retail investors will not be allowed to invest in such issues initially due to the risk involved, said the capital market regulator.

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

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

Unlike in conventional IPOs, where promoters are subjected to a lock-in period of three years for a minimum of 20% of the post-issue capital, shareholders investing in start-ups at the time of listing will have a six-month 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. Thus, founding members of such companies are not in a position to offer the shares for lock-in…," the paper said.

According to Kaku Nakhate, president and country head at Bank of America Merrill Lynch, Sebi’s proposal will help create a market for start-ups, but many of them may still opt for overseas listings to maximize valuations.

“There are some smaller start-ups in India for which local listing can be possible. But the problem still is on how to value these companies because they are not profit-making, but it’s a good move nevertheless," Nakhate said.

Sebi has sought public comments on the proposals by 20 April. U.K. Sinha, chairman of Sebi, said on Monday that final regulations on listing of start-ups will be ready by June. Sinha was addressing the sixth capital market summit organized by the Confederation of Indian Industry. Sinha also said that final guidelines on e-IPOs will be announced shortly.

Separately, Sinha said, Sebi will take action against companies that are unable to comply with the requirement to appoint a woman director on their boards by 31 March, according to the revised listing agreement regulations. According to Indianboards.com, at least 354 of 1,478 NSE-listed firms are yet to appoint women directors.

Joel Rebello contributed to this story.

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