Sebi may soon pave the way for startup listings under separate segment

The Securities and Exchange Board of India (Sebi) may soon bring in a slew of changes to make it attractive for startups to list on the bourses.

Among other things, the regulator may broaden the definition of startups to include non-tech companies and allow them to list directly on the main board of stock exchanges under a separate segment.

The changes are part of the proposals prepared by a Sebi-appointed panel to revive startup listings. The regulator is expected to take a final call on these proposals later this month.

The regulatory framework for institutional trading platform (ITP) was announced on August 14, 2015, to enable listing of new-age and technologically-intensive companies in sectors such as e-commerce, data analytics and bio- and nano-technology. Subsequently, Sebi came up with recommendations to make the platform more accessible via a discussion paper on July 29, 2016.

The platform, however, has failed to take off. “ITP was perceived to be an inferior platform. The aim now is to facilitate the listing of startups under a separate segment that is part of the main board itself,” said a person who was part of the committee that forwarded its proposals to Sebi.

Existing rules allow companies trading on the ITP to migrate to the main board after a period of three years. The person added that the ITP nomenclature may be done away with and the final contours of the platform will be deliberated by the exchanges.

Under ITP, the minimum application size is ~1 million and the number of allottees or investors have to be more than 200. The committee has suggested that the number of allottees be brought below 100 and the minimum application size be slashed to a much lower number. “By doing this, the amount of capital a company can raise becomes significantly lower and a lot more companies in need of early-stage funding can tap the platform,” said the person quoted above.

The definition of institutional investors may now be expanded to include venture capital funds registered outside India, angel networks and angel groups. The ITP rule restricted institutional investors to qualified institutional buyers (QIBs), family trusts and systematically-important NBFCs.

The committee wants the criteria for minimum dilution of the promoter group to be set at 10 per cent at the time of listing to give greater control to the promoters. According to current norms, a shareholder can hold a maximum of 25 per cent of the post issue capital in a startup. “Founder-promoters may not like their holdings to drop to 25 per cent or below, at least in the initial stage.

Seed or VC investors, in fact, would want to own more than 25 per cent in start-ups,” said another person who was part of the discussions to make listings attractive for startups. At least 75 per cent of the initial public offering for startups is currently reserved for QIBs and the rest for non-institutional investors.

“We have asked Sebi to do away with this split. Why should it matter if companies turn to institutions or non-institutions for funding?” said the first person quoted above.

The committee has also asked Sebi to allow retail investors to participate in startup offerings once these companies reach a certain scale and relax other disclosure requirements.

Startups have so far turned to private equity and venture capital investors to raise money. With early-stage funds drying up, a startup platform may help facilitate these companies to raise funds.

According to reports, startups have raised more than $3.5 billion in the first half of 2018 from more than 400 deals.