By Aditya Cheriyan, Gautham Srinivas & Devi Prasad Patel
The international markets have seen many successful IPOs as well as companies queuing up to get listed in sectors such as technology, social media, internet of things and ride sharing. In India, however, companies in these sectors have either listed abroad through holding company structures or have preferred to fund their growth requirements through many rounds of private equity investments. Taking a cue from the Jumpstart our Business Startups Act (the JOBS Act), an US legislation designed to provide access to capital markets for small companies, SEBI set up the Institutional Trading Platform (ITP) to enable companies in sectors like e-commerce, data analytics, biotechnology and other start-ups to get listed and raise funds from the public. The objective of introducing ITP was to enable such new-age companies that have unique business models and fund requirements to list under a more relaxed disclosure regime.
SEBI has, in the past, taken several steps to make the ITP an attractive listing platform for new-age Indian companies. For instance, SEBI issued a consultation paper on October 26, 2018, proposing significant changes to make listing on ITP easier. Most of these changes have consequently been approved at the regulator’s board meeting on December 12, 2018. One of the key changes proposed is to relax the requirement for a company that uses technology, information-technology, or intellectual-property, among others, to provide products or services to have at least 25% of its pre-issue capital held by qualified institutional buyers (QIBs) for it to list on the ITP. QIBs are typically mutual funds, venture capital funds, alternative investment funds, foreign portfolio investors (other than Category III foreign portfolio investors) and foreign venture capital funds registered with SEBI. Under the proposed amendments, in addition to QIBs, this 25% pre-issue capital can also be held by: (i) family trusts with a net worth of more than `500 crore; (ii) Category III foreign portfolio investors which are typically endowments, charitable societies, charitable trusts, foundations, corporate bodies, individuals and family offices; (iii) pooled investment fund with minimum assets under management of $150 million and registered with a financial sector regulator in the jurisdictions; and (iv) accredited investors (AIs) such as individuals with total gross income of `50 lakh annually and who have a minimum liquid net worth of `5 crore or any body corporate with net worth of `25 crore. This relaxation comes with a condition that AIs are not permitted to hold more than 10% of the pre-issue paid up capital. Given that QIB investment in unlisted companies are rare, broad basing the investor base will enable a larger number of companies to be eligible to list on the ITP.
The other significant changes approved by SEBI are:
renaming the platform as Innovators Growth Platform (IGP) from the existing ITP;
removing minimum reservation for allocation to any specific category of investors; allocation is proposed to be on a proportionate basis, as against the existing reservation of 75% of the net offer for institutional investors and remaining 25% to non-institutional investors;
reducing the minimum number of allottees to 50, as against the previous requirement of 200; and
IGP being designated as the listing platform for start-ups with an option to trade under regular category after completion of one year of listing (previously, entities listed on ITP, could at their option, migrate to the main board of that stock exchange).
Additionally, the BSE Limited has prescribed certain eligibility criteria for listing of shares on the ITP, one of which states that there shall be no change in the promoters in the one year preceding the date of filing application with the BSE. Consequently, if the issuer does not have an identifiable promoter, or the issuer is a professionally managed company, then BSE would be required to analyse whether an entity may be allowed to proceed with an issue without a promoter.
To summarise, these regulations are definitely a welcome step by the regulator to enable a larger set of start-ups to use the ITP to list their shares and raise capital. However, there is a dichotomy in the Indian start-up environment. While the current crop of unicorns are too big to list on the ITP, the smaller start-ups may not have the systems, processes and capabilities in place to get listed. For instance, most Indian start-ups are in the nascent stages of growth and do not have corporate governance systems in place to balance the interests of the investors, management, employees and other stakeholders of the company in an objective and transparent manner. Also, once listed, some of these start-ups may not have the manpower and systems to comply with post-issue listing obligations. Further, in order to protect the voting rights of the founders, a lot of start-ups have issued different classes of equity shares with differential rights with respect to voting, dividend and treatment on liquidation. The current regulatory regime makes it difficult for such companies to get listed. On the investors side, the real question to ask is whether the Indian markets are developed enough to understand the valuations which these unique business models present. We see a trend of Indian mutual funds actively investing in Indian companies listing on the main board. It would be interesting to see if their investment guidelines would permit investing in start-ups listed on the ITP.
Cheriyan and Srinivas are both partner, and Patel is senior associate, Khaitan & Co.