Attractive listing: Sebi eases IPO, delisting norms for startups, PSUs

The Securities and Exchange Board of India (Sebi) board last week took several key decisions. Taken together, these offer clarity on many points. One set of changes eases concerns for startups. Another big step is the approval of a co-investment vehicle (CIV) framework under alternative investment fund (AIF) regulations. Sebi has also made changes to regulations governing real estate investment trusts (Reits) and infrastructure investment trusts (Invits), which affect related parties and the classification of units held by such related parties. Further, Sebi has made it easier for certain types of public-sector undertakings (PSUs) to delist. 

The clarifications regarding the issuance of employee stock ownership plans (Esops) in startups have brought relief to founders. The earlier norms prohibited founders and promoters from holding Esops at the time of the draft red herring prospectus (DRHP). Under the new norms, they may be issued Esops and they may exercise those if such Esops are granted at least a year before the DRHP is filed. Also, the regulator has mandated dematerialisation of shares of senior management before the filing of the DRHP. It has scrapped a lockin period of one year for investors holding shares derived from compulsorily convertible securities (CCS), which used to prevent such investors from sometimes participating in offer for sale (OFS). These changes will assist reverse flipping (launching a startup abroad and subsequently listing it in India). Further, Sebi has allowed shares held by foreign venture capital funds, alternative investment funds (AIFs), and public financial institutions to be factored into minimum promoter contributions for initial public offerings. The changes are significantly positive for startups. At a time of heightened levels of uncertainty in the global financial markets, these changes will help startups to raise funds in India. The regulator also announced a framework that allows for easier delisting by PSUs wherein the government owns at least a 90 per cent stake. This will benefit about five listed PSUs. 

Category I and II AIFs may now form CIVs, which will aid investors in AIFs. Until now, if an investor in an AIF wished to make an additional investment in a company the AIF was invested in, this additional investment had to be routed from outside. Doing this using portfolio management services (PMS) ran into restrictions on investment in unlisted companies and bans on investment managers advising co-investors. The CIV makes the process much simpler. In the amendments to Reits and Invits, any units held by related parties are not counted as “public”. In another key amendment, holding companies (HoldCos) may now adjust standalone negative net distributable cash flows against cash received from special-purpose vehicles (SPVs). HoldCos were earlier required to channel 100 per cent of cash flows received from SPVs into a Reit/Invit, and they are now allowed to offset their negative cash flows before distributing the net amount. This is subject to disclosures. Additionally, Sebi has approved a reduction of the minimum allotment for privately placed Invits to ₹25 lakh from the earlier ₹1 crore. Taken together, Sebi’s decisions will make Indian markets attractive for listing, improve the business environment for AIFs, and make life easier for PSUs wanting to delist.