The biggest dilemma, for so many of us, now a day’s is what is startup? Whether it has any definition? Can it get illustrated, in its true sense? What it covers and what not? These questions may not be as relevant for the investors and founders but for regulators definitely.
I recall a post of Kumar Aniket (Co-Author of this article) on January 29, 2016 on staava’s face book page. “We hope that with so much talk about FDI and Startups. We will spare some thought about domestic entrepreneurs who have entire projects stuck up in Bureaucracy. We need to streamline our approval processes. My question is that if Singapore, US and other developed economies are able to respond fast to their entrepreneurs. Then why we cannot match pace with them and provide for speedy approvals………… We need to shift to a system of limited period contract for all senior positions involving slightest decision making with renewals based on performances. “
We both collectively are not as pessimistic as he was in this post but even then time to time the initiatives taken by Government Bodies disappoint a lot. At least, when it is found not only in the form of delay tactics but also at planning and policy formulation level.
Unfortunately, it seems that Regulators have mistakenly taken their own definition about startup: and it seems that “a mobile/web based commercial App, or anything similar to that, in need of arranging funds preferably from overseas or angel broker, in dire need of relaxation from legal compliances especially fundraising, employment and taxation laws”.
The recent example is Securities and Exchange Board of India (SEBI) which in its Press releases (PR No. 137/2016) named “SEBI CAUTIONS INVESTORS” has issued as under:
“UNAUTHORIZED ELECTRONIC PLATFORMS: It has also come to the notice of SEBI that certain electronic platforms are facilitating fund raising on digital platforms like websites and other internet platforms, which are similar to the platforms of stock exchanges. These digital platforms are neither authorized nor recognized under any law governing the securities market. The electronic platforms are allegedly facilitating investment in the form of private placement with companies, as the offer is open to all the investors registered with the platform amounting to a contravention of the provisions of Securities Contract (Regulation) Act, 1956 (SCRA) and the Companies Act, 2013. Only recognized stock exchanges provide a platform where equity and other securities issued by companies are listed and traded in accordance with the provisions of the SCRA. The details of SEBI recognized stock exchanges are available on the SEBI website www.sebi.gov.in.
Investors are hereby cautioned that all dealings on such unauthorized electronic platforms would be in contravention of the relevant securities laws.”
There are hundreds of national regional fund-raising platforms, which have actively existed for the past many years and facilitate the fundraising for startups and other entrepreneurial setups. In recent years not only in India but in fact globally such platforms, which are essentially equity crowdfunding in nature, have acted as a viable alternative to the interfering venture capital money and increasingly unavailable bank financing. If I believe an old report of Forbs Magzine in their own words “crowd funding has $16 billion crowd funded in 2014, with 2015 estimated to grow to over $34 billion” The Report further says that this even have surpassed the VC funding as well. In essence, such platforms act as matchmakers between the potential investors and the entities that are in need of funding.
How something which is unregulated and not been authorized by SEBI “would be in contravention of law”. SEBI is a regulator and if it thinks that something is in contravention then it should come out with specific provision which is being violated by such platform rather than keeping people in dilemma.
SEBI has pointed out contravention of the Securities Contracts (Regulation) Act, 1956 [SCRA] and the Companies Act, 2013 as the reason behind its move. SCRA says that recognized stock exchanges can only provide a platform where securities have to be listed and traded. There assumption is based on assumption that these platforms may not only violate the SCRA but Private Placement norms under the Companies Act, 2013 as well. But isn’t such narrow interpretations are based on some extreme fear and a kind of dreary approach. Such draconian interpretation will push back the fund needed industry on the same footage as the people are in queue in front of ATM.
If we believe on SEBI’s way of interpreting the law, it will simply be a draconian interpretation and will through back this fund needed industry on the same footage as we the people are now a day’s i.e. in queue in front of ATM. Lets evaluate what actually law says here:
Section 2 of SCRA defined
Stock Exchange” (a) anybody of individuals or (b) a body corporate incorporated formed for the purpose of assisting, regulating or controlling the business of buying, selling or dealing in securities.
Act beyond this definition has also put certain eligibility requirements, code of conduct etc. before recognizing any entity as Stock Exchange. For Example Section 4 of the same act says that: Grant of recognition to stock exchanges.
4. (1) If the Central Government is satisfied, after making such inquiry as may be necessary in this behalf and after obtaining such further information, if any, as it may require —
(a) that the rules and bye-laws of a stock exchange applying for registration are in conformity with such conditions as may be prescribed with a view to ensure fair dealing and to protect investors;
b) that the stock exchange is willing to comply with any other conditions (including conditions as to the number of members) which the Central Government, after consultation with the governing body of the stock exchange and having regard to the area served by the stock exchange and its standing and the nature of the securities dealt with by it, may impose for the purpose of carrying out the objects of this Act; and 15 Inserted by Act 32 of 1999, S. 3 (w.e.f. 16-12-1999).
(c) that it would be in the interest of the trade and also in the public interest to grant recognition to the stock exchange; it may grant recognition to the stock exchange subject to the conditions imposed upon it as aforesaid and in such form as may be prescribedQuite evident that mere engaging into buying and selling of securities cannot be treated as stock exchange until it been grant a recognition is essential to have it, before treating any entity as Stock Exchange. If we take simple literal meaning as like SEBI has, then each and every deal maker and investment bank will become the Stock Exchange. I am afraid if a person sitting on negotiation table even from the company and investor side may also become stock exchange. How practical it is, and at least when a platform or other entities are merely acting as arranger without owing any obligation to it.
And again if abovementioned logics aren’t enough then let’s once again take SEBI’s literal meaning and believe on it, whether mere issuance of such cautionary statement is sufficient? Will it solve the purpose for which SEBI has been formed i.e to protect the right of investor? Definitely it is not. It would have been much better if they have come out with some suggested guidelines regulating such Crowd Funding platform for public comments and after that would have bring final regulation, bringing such platform into regulated way. In fact in 2014 SEBI has released a consultation paper on Crowdfunding and but nothing concrete comes thereafter except this cautioned note so far, which is not based on any reasoned argument. The preferred means of regulating such activities would have been by way of notifying the Crowdfunding regulations which SEBI has been conveniently ignoring over the past several years post first releasing a consultation paper in 2014 (re calling what we wrote in upper para’s about Aniket facebook post).
As far as the concerns about the contravention of Companies Act, which looks a little reasoned, where it seems that SEBI is talking about private placement norms, which says a private placement can be made to a maximum of 200 people (and not more than 50 people per offer) in a financial year. This number specifically excludes qualified institutional buyers such as banks, financial institutions etc. and employees of the company to whom shares are allotted under ESOPs. If we carefully the section didn’t say anything at least to such platform but prohibit issuer to restrict the offer up to 200 in a year only. Again the question is how Companies Act, 2013, can be sited to found an argument for issuance of such cautioned notes.
SEBI in past have a long list of failed attempt to bring startup companies and investors on its IT Platform (refer our previous article for portal named “Will SEBI's New Efforts Be Able to Attract Listing of Startups”) and AIF, SME and surprisingly this move is an another step only in opposite direction.
Guest Author
Ashish is Member of ICSI & Graduate in Economics. He is associated with M/s Uniserve Knowledge Foundation (ÜKF") in his capacity as Head of Legal & Secretarial Committee.
