In what could be good news for about 3,000 start-ups in the country, the Securities and Exchange Board of India (Sebi) on Tuesday eased the framework for such companies to raise capital from the stock market.
The regulator laid a framework for listing such companies on a separate platform. It said they didn't have to specify the exact end-use of such funds and resort to traditional metrics to justify the price at which they were selling shares. Sebi also instituted a way for migration of these entities from the smaller platform to the main board.
Some of the relaxed requirements include reducing the lock-in period for investors in start-ups to six months, compared with three years for regular initial public offerings (IPOs). Disclosure norms for start-ups listing in the alternative trading platform will also be diluted.
"Most of these start-ups were thinking of listing outside India. We have made a very special provision for them now," Sebi Chairman U K Sinha said at a press conference, announcing the decisions taken at a board meeting of the regulator. He added Sebi had held discussions with start-ups and taken on board all the requirements listed by them.
"The start-up listing requirements have been brought as close as possible to the international process. This should encourage a lot of companies and investors," said Sanjay Sharma, managing director (equity capital markets), Deutsche Equities.
"Conceptually and fundamentally, a very positive step; directionally, an important step for start-ups...It provides another exit option for investors, which was not available," said Pankaj Khandelwal, founder and chief executive, INI Farms, an agro start-up in which Ronnie Screwvala's Unilazer Ventures has invested.
When a venture capital fund invests, one of the first questions a promoter is asked pertains to possible exit routes. There are three ways in which a venture investor can exit --- another investor buys you out, a strategic sale to another company, or through an IPO. So far, the last option wasn't available. Khandelwal feels the regulator's move will discourage companies from locating their headquarters abroad. As of now, many have their headquarters in Singapore, with an eye on listing in the future.
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Snapdeal, one of India's largest e-commerce companies, agreed the move would benefit India-focused companies in the long run. Others said it would propel these companies to consider India as an option for listing, something they had ignored due to the difficulties in complying with guidelines.
"Sebi has incorporated several measures to ensure these companies find the listing process smooth and simple and, at the same time, created a barrier so that only high net worth individuals, with the ability to judge the quality of such companies and take risks, participate in the process. While there might be elements of the guidelines that may need a relook based on experience, we believe this is a great start," said Harish H V, partner, Grant Thornton India LLP.
The regulator said the new regulations would be applicable to technology companies in the field of intellectual property, data analytics, bio-technology and nano-technology, and in which institutions held at least 25 per cent stake. Other companies can also take advantage of the easier fund-raising mechanism, as long as institutions hold at least 50 per cent stake in them.
As much as 75 per cent of the shares will have to be sold to institutional investors on a discretionary basis. This means the issuer can decide which institution gets its shares. Another 25 per cent will be allocated to non-institutional investors who meet the criteria of investing at least Rs 10 lakh.
The lock-in period for founders will be six months, against the three years mandated for regular companies.
The trading lot, or the minimum size of a 'buy' or 'sell' order for shares of the company, has been set at Rs 10 lakh. This is expected to restrict investments to investors who understand the risks involved with such companies under the relaxed rules. Also, it is likely to keep retail investors out.
After the issue, no individual entity can hold more than 25 per cent stake in a company and there is a six-month lock-in for all shareholders. No institutional investor can hold more than 10 per cent of the issue.
To justify their share price, issuers can use any yardstick except projections. "As standard valuation parameters such as P/E (price/earnings) and EPS (earnings per share) might not be relevant in case of many such companies, the basis of the issue price might include other disclosures, except projections, as deemed fit by the issuers," said a statement by the regulator.
For each public issue, there should be at least 200 allottees. A company will have the option to migrate to the main board in three years if it meets the required criteria.
Soon, Sebi will decide on crowd-funding norms in India, in what might be a framework on the lines of the US Jumpstart our Business Startups Act, passed in 2012.
Those in the know say the first start-up listing isn't too far away. "There is pent-up demand…Our bet is the first IPO will be out by April next year," said Sharad Sharma, angel investor and co-founder, iSpirt. He added companies coming to the market were likely to be worth about $100 million.