SEBI Enables Listing Of Startups Without IPO, Sets Rules For Angel Investments!

This is BIG news for Indian startup Ecosystem – SEBI today released amendments to SEBI Regulations (1998) that have potential to a big effect startups & Small Businesses in India.

Here are some of the decisions that were made in a SEBI board meeting today:

On Startups & SMBs

SEBI has approved the proposal for amendment of SEBI Regulations to permit listing of Start-ups and SMEs in Institutional Trading platform (ITP) without having to make an IPO. Institutional Trading Platform will be accessible to informed investors and they will have to invest minimum of Rs. 10 lakh.

SEBI has also waved the standard regulation, where listed companies have to offer upto 25% of its shareholding to public in order to get listed. However, listing of companies on ITP comes with a rider that they will not be permitted to raise capital, though they can continue to make private placements.

The SEBI amendment also says that standard norms of entry for companies, eligibility criteria, continuous disclosure requirements, simplified exit rules and corporate governance norms will be prescribed.

On Angel Investments

SEBI also announced amendments to their Alternative Investment Fund Regulations (2012) which aims at standardizing Angel Investments in Businesses. Here is a verbatim transcript of what SEBI has put forth:

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  i ‘Angel Funds’ shall be included in the definition of “Venture Capital Funds” under the SEBI (Alternative Investment Funds) Regulations, 2012.

ii.   Individual angel investors shall be required to have early stage investment experience/ experience as a serial entrepreneur/ be a senior management professional with 10 years experience. They shall also be required to have net tangible assets of atleast Rs. 2 crore. Corporate angel investors shall be required to have Rs. 10 crore net worth or be a registered AIF/VCF.

iii.   Angel Funds shall have a corpus of atleast Rs.10 crore (as against Rs. 20 crore for other AIFs) and minimum investment by an investor shall be Rs. 25 lakh (may be accepted over a period of maximum 3 years) as against Rs. 1 crore for other AIFs. Further, the continuing interest by sponsor/manager in the Angel Fund shall be not less than 2.5% of the corpus or Rs. 50 lakh, whichever is lesser.

iv.  For ensuring investments are genuine angel investments, angel funds shall invest only in investee companies which:

a. are incorporated in India and are not more than 3 years old; and

b. have a turnover not exceeding Rs. 25 crore; and

c.  are unlisted, and

d.  are not promoted, sponsored or related to an Industrial Group whose group turnover is in excess of Rs.300 crore, and

e. has no family connection with the investors proposing to invest in the company.

v.  Further, investment in an investee company by an angel fund shall be not less than Rs.50 lakh and not more than Rs. 5 crore and shall be required to be held for a period of at least 3 years.

[Source]

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My View:

In my personal view, this is mixed news for startups and SMEs. Listing of startups without an IPO is a great news, however, some of the conditions put on Angel Investors may work either ways.

These new regulations will standardize angel investments, and will provide safety net for startups who are sometimes held at ransom by angel investors. On the other hand, startups need to make sure that they raise angel investments before they are cross 3 year mark from time of incorporation.

However, with these amendments coming in, smaller individual angel investors will go out of the system. In many cases, startup entrepreneurs rely on 3-4 different individuals to put in money  – With new rules, this may not be possible.

Also, changes like Angel Investors needing to have atleast 10 years experience and tangible assets of Rs. 2 crore may filter out many individual investors as well.

We will have to wait and watch how this pans out…

Would love to hear your views on this!