Updated: SEBI Dramatically Eases Startup Listing & Fundraising Norms

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Startup Investment Alternate Capital[Updated, 24th June 2015]

As expected, Securities and Exchange Board of India (SEBI) has come out with startup listing and fund raising norms that should brings cheers to the fast-growing startup ecosystem in India.

While we were expecting reduced application size from 10 Lakh to 5 Lakh, SEBI seems to have ruled against it and have kept the minimum investment ticket size for investors at Rs. 10 Lakh. Even the No Lock-in period demand has been squashed. It has been reduced to 6 months, compared with three years for regular initial public offerings (IPOs).

Other majot change that has come about in new norms is that as much as 75 per cent of the shares will have to be sold to institutional investors on a discretionary basis. This means that the startup has freedome to 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.

Other major announcements

  • No individual entity can hold more than 25 per cent stake in a company, while no institutional investor can hold more than 10 per cent of the issue.
  • IPO listing – Issue completion will be reduced from 12 days after the transaction to 6 days through paperless filing.
  • M-cap requirement for companies to use fast-track FPOs and rights issues set at Rs 1,000 crore and Rs 250 crore, respectively
  • Reclassification of promoters – Regulator has provided proper framework to address the issue

[Written Previously on May 28th 2015, corrections made as per changes by SEBI]

Securities and Exchange Board of India (SEBI) has indicated that startup listings on the new Alternate Capital Raising Platform would be made easier with less regulations and rules. Indian startup ecosystem, pegged at approximately Rs 1.3 lakh crore, can now look forward to more listings on this new platform.

One of the major developments in this regard is the proposal to redefine start-ups for making it easier for their listings. As per reports coming in, SEBI may define a startup as a professionally managed company wherein no single stakeholder or interest group holds more than 25% equity stake.

The five major changes which are being proposed are:

Minimum Application Size: Rs 5 Lakh Rs. 10 Lakh

In the original Alternate Capital Raising Platform consultation paper shared early this month, it was proposed that an investor needs to invest a minimum of Rs 10 lakh, which is now being reduced to half. This will encourage more investors to the platform attracted by the low entry barrier. At the same time, Rs 5 lakh will deter small investors from entering the market, which is still at a nascent stage.

Rs 5 lakh seems perfect barrier for those investors, who are serious about investing and looking at a long term goal.

Minimum Trading Lot: Rs 3 10 Lakh

Trading would now be allowed at a minimum batch size of Rs 3 lakh, as against Rs 5 lakh proposed in the original consultation paper.

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.

Post Issue Purposes

Initially, SEBI had proposed that listed startups can only spend a maximum of 25% towards ‘general corporate purposes’; an expense which can include virtually everything under the Sun. However, as per the global norms of startups being listed on stock markets, ‘general corporate purpose’ can cover 100% of the expenses, as the life of a startup is very dynamic, and expenses can arise at any moment.

Hence, as per the new proposal by SEBI, startups can simply state that proceeds from the listing and selling of equity will be used for ‘general corporate purposes’, without being too specific. Another breather for startups!

Disclosure Based on Materiality of Developments

Originally, it was proposed that a startup which is attempting to list on this platform needs to disclose all court cases and regulatory orders. Additionally, they were mandated to inform the public at large that they are going to raise funds. (which normally happens in the listing of traditional companies on stock market).

As per the new proposal by SEBI, startups on the Alternate Capital Raising Platform need not disclose all the facts before the listing.

Infact, they would not be even required to share that they are going to raise funds, as small investors are anyways kept out and seasoned investors don’t need this information.

On the issue of court cases, the declaration would purely depend on the latest update and developments.

No 6 month Lock-In Period

Typically, stock market demands that there is a lock-in period after the sale of equity shares so that the promoters don’t run away with the money. Hence, it was proposed that a lock-in period of 6 months be made compulsory in case of the startup listing on this alternate platform.

But now SEBI has realized that in case of ‘new age’ startups, the promoters are actually getting sweat equity, there is hardly any debt on their books and the majority of equity shares are being held by the lenders and investors. Hence, there is no need for any lock-in period. 

According to published norms lock-in period of 6 months is mandatory

This is what happens when a person like Narayan Murthy takes charge of such an exciting project. Last week we had reported that ‘Alternate Capital Raising Platform’ will be headed by Narayan Murthy, and within a week, some major changes and proposals have been discussed, and proposed.

We hope that by the time this ‘Alternate Capital Raising Platform’ is finalized, startups will have more relaxed and lenient rules for listing, so that more and more entrepreneurs can take advantage of the same, and unleash an entrepreneurial revolution in India.

[Image: Shutterstock.com]

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