The rules are part of an effort to create a funding regime that reflects the thriving entrepreneurial scene in India
Mumbai: India’s capital markets regulator announced on Tuesday rules that make it easier for start-ups to list in India, and for investors such as venture capital firms in such start-ups to sell their holdings through initial share sales.
The rules, which have been in the works for a few months, are part of an effort to create a funding regime that reflects the thriving entrepreneurial scene in the country.
The move was welcomed by investors.
“This is a huge step in the right direction for start-ups. One key issue that start-ups face is funding and the relaxation of listing norms by Sebi will go a long way toward solving this. The availability of exit options will increase liquidity in the system which in turn will draw more investors toward India," said Sudhir Sethi, part of iSPIRT List In India expert team and chairman of IDG Ventures India. “Through IPOs (initial public offerings), Indian companies will now not only create value but also keep it in the country."
The Securities and Exchange Board of India (Sebi) announced after a Tuesday board meeting that 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% 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.
Other start-ups can also opt to get listed on the platform, provided at least 50% of their pre-issue capital is held by QIBs.
Sebi’s move is aimed at preventing home-grown entrepreneurs from exploring offshore markets for raising capital and to make it easier for new business ideas to flourish within India. The objective is to also create new opportunities for equity investors to make money by betting on the prospects of new-age companies.
India, which is home to at least 3,100 start-ups, is ranked fifth globally in terms of the combined size of the start-up industry. India trails behind the US, Europe, Canada and China in the space.
“We have got a feedback that most start-ups think of overseas market when it comes to listing. They felt that the regulatory regime for listing of start-ups was not favourable in India. So, we have decided to make it easier," said U.K. Sinha, chairman of Sebi.
On 30 March, Sebi proposed a number of easy listing rules for start-ups on the institutional trading platform (ITP) of stock exchanges.
On Tuesday, the regulator said that for start-ups willing to list on this platform, there will be no cap on the usage of public issue proceeds for general corporate purposes. In conventional IPOs by companies opting to get listed on the main board of exchanges, not more than 25% of the capital raised can be used by a listing company for general corporate purposes.
According to existing rules, there is a lock-in period of three years for (pre-IPO) shareholders holding more than 20% and one year for all other investors. In the case of start-ups, Sebi said the lock-in period will be only six months for all categories of pre-IPO shareholders.
On the special listing platform for start-ups, 75% of the shares will be reserved for such institutional investors. The remaining 25% will be available for non-institutional investors (NIIs), Sebi said.
No person (individually or collectively with people acting in concert) in such a company will be allowed to hold more than 25% of the post-issue share capital in a start-up, it added.
Sebi has also widened the definition of QIBs to include non-banking financial companies and family offices or trusts and other entities that register themselves as alternative investment funds.
Sebi proposed that any 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.
The new rules mandate a minimum investment of ₹ 10 lakh at the time of the IPO and while trading on the special trading platform.
“Sebi is giving a lot of freedom in terms of pricing, disclosures and usage of funds to start-ups willing to get listed on this platform. Also disclosures in terms of litigations will be decided by the board according to materiality of the litigation," Sinha said.
Sebi has also gone easy on start-ups in terms of disclosure requirements. “As the standard valuation parameters such as price to earnings, earnings per share and so on may not be relevant in case of many of such companies, the basis of issue price may include other disclosures, except projections, as deemed fit by the issuers," the regulator said in its statement.
Companies intending to list on the proposed platform will be required to file draft offer documents with Sebi for observations, in line with the general practice.
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.
The minimum number of allottees in a public offer by a start-up has to be 200, which is lower than Sebi’s proposal of 500 investors in the discussion paper.
A start-up getting listed on ITP will have the option to migrate to the main board of a stock exchange after three years, subject to compliance with existing eligibility requirements of stock exchanges.
The new norms for start-ups will come into effect after a gazette notification, which is likely to be put out in the next six weeks, Sinha said on the sidelines of a conference organized by Sebi on Tuesday following the board meeting.
Since December, iSpirt, a lobby group for software product start-ups, has been working with Sebi and three other regulators to change tax rules, listing regulations and other laws to make it easier for product start-ups to operate in India.
Ahead of the budget, iSpirt executives, along with former Infosys finance chief T.V. Mohandas Pai, venture capital firms Accel Partners and IDG Ventures India and 10 product start-ups, including InMobi and Fresh Desk, met Sinha and central bank governor Raghuram Rajan.