Securities Exchange Board of India (SEBI) relaxes restrictions on listing of start-ups

June 23, 2015

Now startups too can raise funds in India

PerformanceGurus Staff

Summary:

Enables un-profitable companies to list to raise funds

Minimum investment amount set to Rs.10 Lakhs ($16,000) to deter small retail investors

Mandatory lock-in period for promoters and pre-listing investors set to 6-months instead of 3 years

Listing will be on a separate institutional platform, which will be available on all stock exchanges

Soon you can be a shareholder in Indian e-commerce giants like Flipkart and Snapdeal among others. Market regulator Securities Exchange Board of India (SEBI) on June 23 announced a slew of major decisions that would pave the way for start-up companies – such as those in e-commerce and new-age sectors— to raise funds from capital market and reduced by half the 12 day period taken for listing of the companies from the date of inviting bids. While the first decision will help the companies, the second will be welcomed by investors.

SEBI’s decision to relax norms for startups comes in the backdrop of growing clamor from Indian entrepreneurs in the field of e-commerce, and digital and technology sectors to be allowed access to capital market. In the absence of such provisions, these entrepreneurs were forced to shift out of India and list their companies on foreign exchanges.

Under the new norms unveiled by SEBI’s board, these start-up companies will be listed on a separate institutional trading platform, which will be available on all stock exchanges. This could open the floodgates for listing of idea-driven companies, which have little or no scope to access funds.

However, small retail individual investors would not be allowed to invest in such companies. The SEBI has kept Rs 10 lakhs ($16,000) as the minimum amount an individual or institutional investor will have to invest in such ventures. The higher investment cap has been put in place to discourage the small investors since these startups will come with a big risk tag, and the disclosure and other listing requirements have been relaxed compared to other companies.

For listing such companies, the SEBI has reduced the mandatory lock-in period for the promoters and other pre-listing investors to six months as against three years for other companies.

SEBI Chairman U K Sinha told reporters in Mumbai that in case of technology start-ups at least at least 25 per cent of the pre-issue capital has to be with institutional investors. This will go up to 50 per cent in case of other new-age companies.

“Indian start-up space is very vibrant and the country is ranked number five as far as start-ups are concerned. More than 3,500 start-ups are there in the country and a large number of M&As have also happened.

“However, most of these start ups are thinking of listing outside India because they felt the regulatory regime was not favourable to them. So, we have made this special provisions for them,” the SEBI chairman said, adding,” SEBI is working on the new crowdfunding norms, which would provide another avenue to the new-age companies and entrepreneurs to raise funds and a decision in this regard can also be taken soon. These start-up companies could move to the main platform of the stock exchanges after three years, subject to compliance with eligibility requirements.

Welcoming, the SEBI’s decision. leading e-commerce firm Snapdeal said this move would provide Them “much-needed access to funds”.

The SEBI chairman said that the Board has arrived at the decision after holding four round of extensive discussion with the representatives of start-up companies. “We asked them what their problems were and they listed out all the requirements. I hope this market would become more vibrant going ahead,” he said.

“We have diluted the norms, because we are not allowing the small retail investors to come in yet. The minimum investment amount would be Rs 10 lac,” Sinha said. He also clarified that the norms have been relaxed to allow participation of such companies that may not be in profit for last 1-2 years.

“Still, they are very empowered and informed investors are investing hundreds of millions of dollars in them,” Sinha said.

The other important decision taken was regarding reducing the period taken for listing of companies from the date of inviting bids is seen as a major step towards encouraging greater retail participation in the capital market. The measure will come handy for short-term investors who would like to make some quick money on listing and then get out of the market.

The SEBI also plans to make IPS process on line (completely check free) and introduced a concept to fast tracking capital raising for various type of companies. The new norms will be come into effect from January 1st, 2016.

Note:

The conversion rate used in today’s article is 1 USD = 63.60 rupees.

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