Will SEBI's New Efforts Be Able to Attract Listing of Startups?

Story of under Investor:

Being a Stock Broker, if I see to Indian capital Market, at least in last couple of years, I have awesome returns on my portfolio. IPO market has revived, Nifty and Sensex has touched new heights and even the retailers have returned here. All these have helped me to make good money in the market. But is this the whole picture or something I am losing again and even without knowing it?

Whether I am still an Under Investor? And answer for me is yes I am.

Let’s have a relook about all that happening just over the floor and outside world.

It is very common now a day that worldwide, the valuations of internet companies have zoomed in the last few years giving their investors mind-boggling returns. Even in India we all are witnessing the impressive rise of E-commerce, Mobile and Internet based technologies based companies, which is a new trend developed only in last couple of years.

But un-commonality between India and the rest of the world, starts from here only. Indian investors, even the one with the appetite for all risks, have lost out the opportunity to invest in new age tech companies, when most domestic tech startups which are taking the private equity route to funding or going outside India to list themselves.

This is not a good signal neither for Investors nor for Indian Capital market and when the door for direct listing in overseas exchanges is a reality, now it can be a worrisome reality for Market if successful startup companies would completely bypass Indian Market.

Mr. Aniket, Founder Staava Consultancy Private Limited and an expert of Tech & E-commerce Startup Industry and the co-author of this Article always express as how domestic investors have lost an opportunity to make money while losing an option to invest in MakeMyTrip, which is listed in NASDAQ but not in India. He further says even it can be trendsetter for upcoming Internet and tech companies.

Even Regulators have to say something about it:

“Not a single company has got listed on this so far, although we formulated the rules after very detailed consultation with the industry and market players. We are again looking at revising the norms as there have been some fresh suggestions from the industry”

The statements were made by SEBI chief Mr. UK Sinha, and somewhere referring about a much hyped but a desert segment of stock market, i.e. Institutional Trading Platform (ITP), launched last year, the platform, as it anticipated that time, be able to attract number of Indian startups and smaller companies to come and join hand for listing. In his own statement, despite it was launched with all big expectations and only after wider discussion, couldn’t able to attract listing through its route. There have been several reasons for poor responses. Recently SEBI have come up with a discussion paper for public comments and decided to not just relax rules further but also rename the institutional trading platform as 'High-tech Start-up & Other New Business Platform to better reflect the type of companies that the platform seeks to attract.

Years Back, The UPA Government in Budget speech, announced that the start-ups and SMEs can get listed on the bourses without IPO. Accordingly, SEBI has made the provision in ICDR guideline by introducing Chapter XC whereby listing on the Exchange made possible without bringing Initial Public Offer (IPO). SEBI has notified the same on 8th October 2013 and also issued a detailed circular on 24th October, 2013.

As on date a startup planning for Listing at ITP shall have adhered to conditions precedent to listing as emerging, inter-alia, from

· Securities Contracts (Regulations) Act 1956,

· Companies Act 2013,

· Securities and Exchange Board of India Act 1992,

· And other rules and/or regulations framed under foregoing statutes, as also any circular, clarifications, guidelines issued by the appropriate authority under foregoing statutes.

The Eligibility Criteria for the company desirous of listing are as follows:

1. The company, its promoter, group company or director does not appear in the willful defaulters list of Reserve Bank of India as maintained by Credit Information Bureau (India) Limited (CIBIL).
2. There is no winding up petition against the company that has been admitted by a competent court.
3. The company, group companies or subsidiaries have not been referred to the Board for Industrial and Financial Reconstruction within a period of five years prior to the date of application for listing.
4. No regulatory action has been taken against the company, its promoter or director, by the Board, Reserve Bank of India, Insurance Regulatory and Development Authority or Ministry of Corporate Affairs within a period of five years prior to the date of application for listing.
5. The Company shall satisfy at least one of the following criteria as on date of application:-
Net Tangible Assets of minimum Rs. 1 Crore. (Net Fixed Assets plus Net Current Assets)
OR
Net income* (excluding extraordinary and other income) of Rs. 50 Lacs as per the latest audited financials. *(Net income = Sales – Purchases)
6. There has been no change in the promoters of the Company in preceding one year from date of filing application to BSE for listing on ITP segment.
7. Mandatorily signing tripartite agreement with both the depositories.

Financial Conditions:

- The paid up capital of the company has not exceeded 25 Crore rupees in any of the previous financial years.
- The company has at least one full year’s audited financial statements, for the immediately preceding financial year at the time of making listing application.
- The company has not completed a period of more than 10 years after incorporation and its revenues have not exceeded 100 Crore rupees in any of the previous financial years
- At least one of the following criteria:

1. At least one alternative investment fund, venture capital fund or other category of investors/lenders approved by the Board has invested a minimum amount of 50 lakh rupees in equity shares of the company.

2. At least one angel investor who is a member of an association/group of angel investors which fulfills the criteria laid down by the recognized stock exchange, has invested a minimum amount of 50 lakh rupees in the equity shares of the company through such association/group.

3. The company has received finance from a scheduled bank for its project financing or working capital requirements and a period of 3 years has elapsed from the date of such financing and the funds so received have been fully utilized.

4. A registered merchant banker has exercised due diligence and has invested not less than 50 lakh rupees in equity shares of the company which shall be locked in for a period of three years from the date of listing. The same merchant banker is also required to submit a Due Diligence certificate as per format given in Form A & Form H of Schedule VI of SEBI (ICDR) Regulations, 2009.

5. A qualified institutional buyer has invested not less than 50 lakh rupees in the equity shares of the company which shall be locked in for a period of three years from the date of listing.

6. A specialized international multilateral agency or domestic agency or a public financial institution as defined under section 4 A of the Companies Act, 1956 has invested in the equity capital of the company

To encourage early-stage ventures to list here, SEBI had at the time of launch relaxed many of the more stringent rules governing IPOs. On the ITP,

· Promoters’ capital will be locked in only for six months, against the three-year lock-in for normal IPOs.

· There is also no need to make elaborate disclosures on how IPO funds will be used.

· The company that lists on the ITP will be given an option to migrate to the main board after three years.

However, having relaxed many rules that protect investor interests in IPOs, SEBI has made sure that only institutional investors and HNIs invest in the new ITP. The minimum application requirement for participation in these IPOs has been set at a high 10 lakh. Only institutional investors and investors other than retail individuals will be allowed access to the new platform.

Even then these efforts have not attracted many players to list on ITP and now SEBI has proposed to ease the rules and have proposed the major changes in the regulation are as under: