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Public money and listing for start-ups

Finsec Law Advisors

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After a prolonged debate as to how best to facilitate start-up funding through the public markets, SEBI has finally released new listing norms for start-ups with an intention to provide a viable domestic avenue for such companies to raise capital. To this end, SEBI has issued the Fourth Amendment to ICDR Regulations, 2015 and has replaced the existing Chapter XC of the ICDR Regulations. Previously, Chapter XC permitted companies younger than 10 years with revenues under Rs. 100 crore and having paid-up capital of less than Rs. 25 crore to list their shares without making a public issue on an Institutional Trading Platform (ITP). The erstwhile ITP did not allow capital raising, but was put in place solely for the purpose of providing an exit to its existing investors. The new ITP not only allows start-ups to raise capital, it also provides several relaxations as compared to the procedures involved in raising capital under the traditional IPO route. Moreover, the age and size requirements from the erstwhile ITP have also been removed. Following is a brief summary of the changes introduced to the ITP platform:

Eligibility: Any entity which is a) “intensive in the use of technology, information technology, intellectual property, data analytics, bio-technology or nano-technology to provide products, services or business platforms with substantial value addition”, b) has 25% of its pre-issue capital in the hands of QIBs and c) with no person, individually or collectively with persons acting in concert, holding 25% or more of the post-issue share capital can make use of the new ITP. For other entities, at least 50% of the pre-issue capital is required to be held by QIBs, for them to access the new ITP.

Issue size: Although the minimum issue size has been brought down (to 20 Cr.) from what was initially stipulated (50 Cr.), the new ITP continues to be a big-player’s market where the minimum trading lot shall be Rs. 10 lakh. The allocation in the net offer to public category would be 75% to the institutional investors and 25% to non-institutional investors. SEBI has permitted discretionary allotment for institutional investors but allotment to non-institutional investors has to be on a proportionate basis.

Listing: Listing without a public issue can be done through an information document, approved and signed by the board of directors of the entity, the CEO and the CFO, whereas, an entity seeking to raise capital, may do so through an offer document filed with SEBI. The minimum application size shall be Rs. 10 lakh with at least 200 allottees.

Basis of Issue price: Companies would have ample flexibility in relation to pricing their securities. The basis of issue price may be in the form of disclosures, except projections, as deemed fit by the issuers in order to enable investors to take informed decisions.

Objects of the Issue: Although the new norms merely require an issuer to disclose the broad objects of the issue, the expected relaxation allowing companies to use more than 25% of the issue size for general corporate purposes has not been specifically provided for.

Lock-in: The entire pre-issue capital of the shareholders shall be locked-in for a period of six months from the date of allotment in case of a public issue or date of listing in case of listing without a public issue. Pre-issue ESOPs and shares held by VCFs / Cat I AIFs / FVCIs would not be subject to these restrictions, subject to certain conditions.

Exit or Migration: Companies would have the option of exiting the new ITP with the approval of the shareholders through a special resolution through postal ballot where ninety per cent of the total votes and the majority of non-promoter votes have been cast in favor of such proposal. Further, companies would be permitted to migrate to the main board after expiry of three years from the date of listing.

Other Exemptions: The SEBI (Delisting) Regulations would not be applicable to companies listed on the new ITP and the securities listed on the ITP would henceforth be deemed to be ‘unlisted securities’ for the purposes of the SEBI (AIF) Regulation and SEBI (SAST) Regulations.

All in all, this is a welcome move and it would be great to see new-age companies including e-commerce ventures accessing the ITP. Now, the recognised stock exchanges would have three primary divisions of equity listing– the main board, the SME board, and the ITP. However, some discomfort remains over the conservative attitude of the regulator towards retail investors. Additionally, the requirement of having such a high QIB holding and a diluted promoter holding may prove to be a hindrance for start-ups to list on the platform. SEBI may consider relaxing the same.