A revamp of the listing, fundraising norms on the anvil; Sebi to also expand definition of high-tech start-ups
Mumbai: The capital markets regulator is planning to expand the categories of investors eligible to fund start-ups; relax rules for listing shares; and ease promoter-holding and minimum trading-lot norms to help the country’s 3,100-odd start-ups to raise capital, two people directly familiar with the development said.
The Securities and Exchange Board of India (Sebi) also plans to further liberalize the norms related to alternative investment funds (AIFs) introduced in 2012, to increase access of capital to start-ups. The AIF route has made investments in start-ups more transparent and easier for private equity (PE) funds, venture capitalists and high networth individuals.
“Within the existing norms, certain changes in definition of eligible investors could be made to encourage more investors to put money in promising early-stage businesses,” said one of the two people cited above. “We are also examining if the minimum investment amount in the AIFs could be brought down slightly.”
Rules may also be relaxed to allow more early-stage companies to get listed.
The existing norms allow only so-called high-tech and new-age start-ups.
As many as 40 start-ups are ready to get listed either in India or overseas, according to Harish H.V., partner (India leadership team) at Grant Thornton India.
“Sebi’s thinking is in the right direction to liberalize the norms for start-ups, but the regulator should be careful while expanding the definition of a start-up eligible for listing,” said Harish.
“While amending the norms to attract more start-ups to get listed, it has to be ensured that no fly-by-night operator takes advantage.”
In June 2015, Sebi allowed the exchanges’ institutional trading platform (ITP) to be used for capital raising by start-ups which are intensive in their use of technology, information technology, intellectual property, data analytics, biotechnology or nano-technology, to provide products, services or business platforms with substantial value addition.
However, even among these companies, only those that have at least 25% of their pre-issue capital being held by qualified institutional buyers (QIBs) were allowed to access the exchange platform.
For other categories of startups to be eligible for getting listed, at least 50% of the pre-issue capital in the company has to be held by QIBs. Additionally, no person (individually or collectively with persons acting in concert) could hold 25% or more of the post-issue share capital in a listed start-up.
The norms laid down by Sebi, however, failed to attract any start-up to get listed.
The regulator is now considering expanding the definition of so called “high-tech” and “new-age” firms, which could opt for listing on ITP, said the second person. “The definition could be modified to include more categories of start-up companies to be eligible for the platform,” said the second person.
Further, the present norms allow only two categories of investors—institutional investors (with net worth of more than Rs.500 crore) and non-institutional investors (NIIs) other than retail individual investors to access the proposed ITP.
While getting listed on ITP, the minimum application size from such investors cannot be less than Rs.10 lakh and the minimum trading lot post-listing cannot be less than Rs.10 lakh.
These promoter-holding and minimum trading-lot norms are discomforting for startups, if and when they plan to get listed, according to a person associated with Indian Angel Network.
Sebi is planning to relax these norms, said the two people cited above.
“Sebi has received representations that the current cap on promoter holding on the company which is willing to list on the start-up platform, at 25% be relaxed to around 50-75%,” said the second person.
Also, the trading lot size at Rs.10 lakh is too high for any investor, and market participants have requested its reduction to Rs.5 lakh as earlier proposed. The regulator is actively considering these recommendations.
Although Sebi may not explicitly encourage retail investors to buy shares of start-ups, a lower minimum trading lot will enable more investors to invest in these early-stage companies.
“In order to make listing feasible for start-ups, it is very important to keep the minimum trading lot size less than the minimum required subscription amount,” said Harish. “The suggestion we made is to keep the minimum trading lot-size at Rs.2.5 lakh if the minimum subscription amount in the listing issue of the startup is fixed at Rs.5 lakh. Otherwise, if the value of the stock comes down even slightly after listing, it will be difficult for the investor to trade in the start -up stock.”
In January, an advisory panel headed by Infosys co-founder N.R. Narayana Murthy had suggested changes to facilitate capital raising.
Sebi’s latest plans are somewhat in line with the panel’s recommendations.
Th panel had suggested that Sebi change its eligibility norms for investors to put money in alternative investment funds.
The current norms require a person to invest at least Rs.1 crore in an AIF. The rules also say that any individual with total annual income of at least Rs.50 lakh should be allowed to put money in AIFs.
According to market experts who deal with AIFs, Sebi may consider easing some of these restrictions.
“The minimum investment required in the AIFs could be reduced to include more potential investors,” said the first person.
AIFs collect funds from high net-worth investors to invest primarily in unlisted securities and start-ups to promote entrepreneurship.
According to latest available Sebi data, AIFs got funding commitments worth Rs.30,687 crore by the end of December. Of this, at least Rs.14,031.39 crore has been already invested.
According to the Murthy panel, pension funds, insurers, domestic financial institutions and banks should contribute more to develop the AIF industry. Domestic pension funds in India, including the National Pension System (NPS) and the Employee Provident Fund Organization (EPFO) should allocate up to 3% of their assets to AIFs by 2017 and 5% by 2020, the panel had suggested.