Sebi proposes alternative platform for new-age start-ups to raise capital

31 Mar 2015

The Securities and Exchange Board of India (Sebi) has come up with draft proposals for an alternative investment platform for the country's booming new-age start-ups.

In a discussion paper issued on Monday, the capital market regulator has suggested relaxing some key requirements for encouraging internet start-ups to list on domestic bourses.

Going by the developments in the US, Europe, China and other markets, Sebi said, these young entrepreneurs are coming out with innovations that have the potential to create technology companies, which would bring in completely new business opportunities by facilitating creation of new products for consumers or contribute towards system improvement and process efficiencies in existing operation of companies.

Many of the companies have the characteristic that their knowledge-based products are not widely understood or appreciated by a large number of investors. They do not incur profits in the initial years, but have the potential for exponential growth in a short time later.

However, many of them are getting acquired by large companies at high valuations, Sebi noted, adding, "Innovators are, therefore, looking for an environment where their inner strength and potential is fairly recognised."

In India such an eco system has come to exist in many parts of the country including Karnataka, Kerala, NCR, Maharashtra, etc. For want of a better alternate capital raising platform and other regulatory requirements price discovery within the country, Sebi noted, many of these companies plan to get listed in Singapore or the USA.

Sebi has proposed a new platform for raising money within the country that will be initially be made applicable to companies which are in the area of software product development, ecommerce, new-age companies having innovative business model, etc, which create new business opportunities or which serve important efficiency enhancement in existing business activities.

For such companies, Sebi said, capital raising will be allowed on the institutional trading platform of stock exchanges with certain modifications in the current regulatory framework, including relaxation on restriction of fund raising, minimum investment from certain category of investors, etc.

The proposed platform will have two categories of investors, ie, qualified institutional buyers (QIB) and non-institutional investors (NII). It peoposes that family trusts may also be allowed to apply under the QIB category.

Allotment to QIBs may be on a discretionary basis whereas for NIIs, it will be on proportionate basis. Allocation between the two categories will be in the ratio of 75 per cent and 25 per cent, respectively. Any under subscription in non-institutional categories will be available to QIB category.

No QIBs will be allotted more than 5 per cent of the issue size.

Sebi has prescribed the minimum application size in case of such issues as Rs10 lakh and the minimum number of allottees at 500.

The listing on institutional platform will be for a period of at least 1 year, after which the company will have the option to migrate to main board subject to compliance with eligibility requirements of the stock exchanges.

The minimum trading lot on the platform will be of Rs5 lakh. There is also a suggestion that this threshold limit on trading lot be lowered for sale of shares by the employees who have been granted ESOPs.

For Category I and II AIFs, which are required to invest a certain minimum amount in alternate capital raising platform in unlisted securities, investment in shares of companies listed on this platform may be treated as investment in 'unlisted securities' for the purpose of calculation of the investment limits.

New-age companies having innovative business model and belonging to knowledge-based technology sector, where no person (individually or collectively with persons acting in concert) holds 25 per cent or more of the pre-issue share capital, may be considered as professionally managed companies and access capital through the said institutional platform.

Such issuers will be required to file draft offer document with Sebi for observations, as provided in ICDR Regulations. The issuers have to ensure compliance with various applicable provisions in ICDR Regulations (including disclosures on key managerial personnel and business model), subject to the following carve-outs.

The main object of disclosures under the ICDR Regulations may be for general corporate purpose. Further, the disclosure may be restricted to only broad objects. This is in line with the major international jurisdictions.

Lock in of the entire pre-issue capital should be for a period of 6 months uniformly for all shareholders.

The basis of issue price may include disclosures, other than projections, as deemed fit by the issuers accessing the market on the institutional platform in order to enable investors take informed decisions

The committee further recommended that the definition of QIBs may be extended to include systematically important NBFCs as per RBI guidelines and family offices/trusts, subject to such family offices/trust registering itself as alternate investment funds (AIF) under the AIF Regulations.

Further, any other entity registered with Sebi subject to minimum net-worth of

Rs500 crore may also be considered as a QIB.

Disclosure with respect to group companies will be restricted to such group companies as covered under the applicable accounting standard (Currently, Accounting Standard 18). In addition, disclosure shall be given for such group companies as considered material by the board of the issuer. The policy on materiality should be disclosed in the offer document.

Sebi also prescribed disclosure norms and regulatory actions with respect to taxation disputes, regarding claims related to direct and indirect taxes.

Sebi has proposed that the product advertisements of the issuers may be exempted from the requirement of 'disclaimer'. However, disclosure should continue in other corporate and issue related advertisements.

Sebi has sought public comments/suggestions on the implications of the said policy framework on the market participants, including issuers and investors, public. It has provided the necessary format for comments/suggestions on its web site.