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SEBI paper proposes easing listing norms for startups

A recent paper by the Securities and Exchange Board of India (SEBI) has recommended easing several requirements for startups to launch initial public offerings on the market regulators’ Innovative Growth Platform (IGP). With over 30 unicorns, or billion dollar companies, India’s booming startup ecosystem is likely to see several stock listings in the coming years, including Walmart-backed Flipkart and PhonePe.

The paper says that despite the market regulators’ efforts to encourage startups to list their shares on stock exchanges over the past few years, there have been no listings on the IGP platform. “Recently during various interactions with various start-ups and market participants, SEBI has received certain feedback and suggestions for revisiting the IGP norms. The recommendations / suggestions received were placed before Primary Market Advisory Committee (PMAC) of SEBI,” it said.

SEBI has invited comments to the consultation paper, the deadline for which ends on January 11, 2021.

Recommendations by SEBI

Pre-issue capital: At present, at least 25% of pre-issue capital has to be held by eligible investors for two years. The paper recommends reducing the minimum period for holding 25% of the pre-issue capital to 1 year. “Reducing the hold period would help start-up companies in attracting investors who are inclined for an early listing at the time of investing. Further, this will potentially make more number of companies eligible for IGP listing,” it said.

Lock-in period: At present, the pre-issue capital is required to be locked-in with investors for a minimum of six months from the date of listing. However, since venture capital funds, category-II Alternative Invest Funds, are exempted from this requirement. The paper recommends that a similar exemption should be made in the IGP norms so that it is harmonised with the Main Board [primary listing platform] requirement.

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Anchor investors: Current IGP regulations provide specific allotments to institutional and non-institutional investors on a proportionate basis while there is no allotment for anchor investors. However, Main Board regulations state that 60% of the issue size can be allocated to anchor investors on a discretionary basis prior to the issue opening, provided there is 30 day lock-in on the shares allotted. The paper suggests that the issuer company can allocate up to 60% of the issue size to all eligible investors on a discretionary basis, prior to the issue opening.

Accredited Investors (AIs): The paper recommends that the present limit of 10% on AIs should be removed and the pre-issue capital held by these investors may be considered for entire 25% of the pre-issue capital required for meeting eligibility condition norms. “Therefore, it may be clarified that pre-issue capital held by promoters/promoters Groups, even if they are registered as AIs shall not be considered for the said minimum 25% eligibility requirements,” the paper says.

Family trusts: The paper recommends reducing the net-worth requirement for Family Trusts, who qualify as eligible investors, to ₹25 crore from ₹500 crore at present.

Voting rights: The current IGP regulations do not allow issuer companies to issue Differential Voting Rights/Super Voting Rights shares to promoters and founders, while Main Board regulations allow the same. The paper recommends allowing issuing companies on the IGP to provide Differential Voting Rights/Super Voting Rights shares to promoters and founders.

Continuing rights: IGP regulations at present state that Special Rights will collapse when a stock is listed and that shareholder approval is required to reinstate these rights. The paper says that specifically defined special rights for investors in excess of 10% of capital can continue to be in force upon a stock listing. “Special rights along with thresholds may be built into the offer document prior to listing so as to ensure that all participating investors on IGP get upfront information on such rights,” it said.

Takeovers: SEBI regulations mandate that for takeovers, the acquiring firm should have 25% stake in order to trigger an open offer. The paper recommends reducing the threshold for triggering an open offer to 49%. “Start-up companies also continuously seek larger quantum of funding for its capital expansion plans. Strategic investors may like to take higher shareholding in such companies. Thus a lower threshold for trigger of open offer would restrict the flexibility of the investors to move in and out of investments in start-ups,” it said.

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Voluntary delisting: The paper recommends that the current norm of 2/3rd minority holding approval required for delisting from IGP can be changed to majority of minority. Further it says that delisting may be considered if 75% of the total shareholding / voting rights are acquired.

Migration to Main Board: Companies looking to list on the Main Board, that do not meet the profitability criteria under the Main Board regulations, need to issue 75% of its public issue to Qualified Institutional Buyers (QIBs) whereas under the IGP regulations the stipulation has been set at 75% of the total issued capital to QIBs. These norms are stringent, the paper says, recommending that the stipulation should be reduced to 40%.

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