Sebi's announcement of a simplified alternative framework for capital raising by startups is welcome
With recent reports of $2.46 billion being invested in Indian startups by venture capital investors only in the first half of 2015 (as against $2.34 billion in 2014), the global investor interest in Indian tech startups (internet and mobile) has never been greater. Sebi’s announcement of a simplified alternative framework for capital raising by startups is another proactive response to the dynamic entrepreneurial landscape in India.
The SME segment of exchanges was launched in late 2012, heralding India’s first initiative to create a specialised platform catering to SMEs to help them raise capital with relaxed listing/compliance requirements. Separate platforms have been introduced by SME exchanges, through institutional trading platforms (ITP) to enable SMEs and startups to list their securities without being permitted to make a public offer or raise capital. Rather than a long-term listing, the ITP was primarily set up to provide a trading platform for shares of SMEs and startups held by venture capital funds (VCFs) and other alternative investment funds, besides providing much-needed visibility to SMEs.
Sebi has now amended the regulations governing the ITP to enable such platforms to facilitate capital raising by startups. Technology startups can list on the ITP of exchanges if at least 25% of their pre-issue capital is held by qualified institutional buyers (QIBs). Non-technology startups can list on the ITP if at least 50% of their pre-issue capital is held by QIBs.
Some of the salient features include relaxation in listing norms to provide a common lock-in period of ‘all’ shareholders for six months. Disclosure requirements for startups listing on the ITP has also been relaxed with only ‘broad objects of the issue’ to be disclosed. There is no cap on amounts raised for general corporate purposes. This is in stark contrast to the stringent fund-use, disclosure and listing requirements for the main board IPOs. Acknowledging that standard valuation parameters such as P/E, EPS, etc, may not be relevant to such companies, Sebi has proposed that the basis of issue price may include such other disclosures as the issuer may deem fit, except projections. While the number of allottees for public offers on the ITP has to be 200 persons or more, no person (individually or collectively with persons acting in concert) shall hold 25% or more of the post-issue share capital in such companies. QIBs also would not be eligible for more than 10% of the issue size of the company in the ITP. The categories of investors have been restricted to institutional investors (QIBs such as VCFs, family trusts, intermediaries registered with Sebi, all with net-worth exceeding R500 crore) and non-institutional investors, thereby excluding retail individual investors. Interestingly, companies have an option to migrate to main boards such as the BSE and the NSE after a period of three years of being listed in the ITP.
Faced with a situation where hugely-funded home-grown tech startups like Flipkart have already shifted their parent structures overseas (Singapore, the US, etc) and an increasing number of emerging tech startups walking the same path to raise funds and provide exit to investors, the securities watchdog has attempted to walk the tightrope in order to lure startups to list on the alternative trading platform.
Globally, alternative trading platforms in London or Luxembourg have not met with stupendous success, yet they offer a much-needed alternative route for smaller entities meeting specific thresholds to raise capital. Adequate liquidity on the platform will be a major determinant of the success of the platform.
As on date, there are 11 companies listed on the existing ITP of the BSE-SME exchange. No doubt, the new measures build on the existing framework to create a liquid and viable alternative trading platform for startups in India. But is this going to be a game-changer in the startup ecosystem, encouraging startups to consider listing on the ITP to raise funds and/or to offer exits to their existing VCFs and other investors? Clearly, that may not be the case at the moment. For tech startups, the tangible and intangible benefits of moving to tech hubs like the US or Singapore may far outweigh the benefits of choosing to list in India. With early-stage investments maturing and the M&A opportunities amongst startups evolving in India, a multi-pronged approach focused on business-friendly policies, predictable tax structure and easy access to capital would ensure a flourishing startup ecosystem.
It is to Sebi’s credit that it has attempted to build a platform to generate adequate liquidity by broad-basing the shareholder base. While market-making efforts in addition to the regulations would be welcome, it remains to be seen if the ITP gains traction with the startup community—both entrepreneurs and investors. At the very least, it will remain an additional channel offering a much-required alternative route for entrepreneurs to raise capital in India.
Sharanya G Ranga is partner and Parag Bhide is senior associate, Advaya Legal