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The markets regulator on Thursday made it easier for startups to go public in India as it moved to stanch a potential exodus of local companies to foreign capital markets.

The Securities and Exchange Board of India (Sebi) approved several changes to the listing rules on the Innovators Growth Platform, including reducing from two years to one the time early-stage investors need to hold 25% of pre-issue capital, and allowing IPO-bound startups to allocate up to 60% of the issue size to any eligible investor with a lock-in of 30 days on such shares. Currently, startups going public are barred from making discretionary allotments.

The markets regulator also relaxed the threshold trigger for open offers from the existing 25% to 49% for startups, barring situations where there is a change in management control of the target company.

Sebi also eased norms for the delisting of startups. Delisting will be considered successful if the acquirer or promoter shareholding, along with the shares tendered and accepted, reaches 75% of the total issued shares of that class, and at least 50% of the public shareholding is tendered and accepted. Further, the reverse book-building mechanism will not be applicable to startups seeking to go private. For the computation of offer price, the floor price will be determined in terms of takeover regulations, along with delisting premium as justified by the acquirer or promoter.

Sebi has also decided to ease the rules for companies seeking to migrate to the main board from the Innovators Growth Platform. Startups that wish to be listed on the main board can now do so by allocating 50% of the capital to qualifed institutional buyers.

Industry experts said Sebi’s move is aimed at encouraging successful Indian startups to list in the domestic markets instead of foreign bourses. Several Indian startups and young companies, including Flipkart, are looking to list abroad. Many other well-known startups such as Zomato, Swiggy, Delhivery, Policybazaar, Freshworks and Nykaa are also said to be eyeing public listing overseas.

“The markets regulator realizes that startups are using SPAC (special purpose acquisition company) and shell companies as a way of public liquidity. If that becomes the norm, it is basically an opportunity lost for Indian capital markets and the regulator needs to provide opportunities for Indian investors. This has come at the right time as a lot of startup public market activity is at a very advanced stage," said Abhinav Bhalaik, partner, AlgoLegal, a legal firm that advises venture funds and startups on fundraising.

Many startups focus on growing their revenues faster than mature companies, often sacrificing profits in the initial years for growth. Since profitability is a key criterion for companies to get listed on the main board of stock exchanges, Sebi created an alternative listing platform called Innovators Growth Platform for new-age entrepreneurial ventures in 2019. However, the platform has found few takers, prompting the regulator to make the changes, experts said.

In recent months, several domestic companies have explored listing in the US and Singapore markets due to their friendlier listing norms and multiple listing options. For instance, renewable energy firm ReNew Power Ltd is set to list through the SPAC route rather than the conventional IPO route. Under this route, the company wishing to get listed typically first gets acquired and merged with a listed company that has been created for the sole purpose of enabling other companies to get listed. The compliance requirements are also fewer than those required in conventional IPOs.

“Indian startups still feel that foreign markets are far more mature for tech IPOs. Investor education on tech stocks is also low, with few tech companies listed on the stock exchange. While Sebi’s new listing regime is a step in the right direction, much still needs to be done in giving the right confidence to Indian startups while providing investor education," said a founder of a startup, who didn’t want to be named.

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