How SEBI Has Made It Simpler For the Startup Ecosystem With an Eased-Out Framework From the Regular Exchange

The new changes proposed by SEBI have improved the regulatory regime for startup governance in the country

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The Securities and Exchange Board of India (SEBI) has announced a series of regulations and changes aimed towards encouraging the startup ecosystem in India. These regulations are targeted towards providing relaxed norms and a clear framework including reducing the holding period for pre-issue capital and allowing discretionary allotment to eligible investors for the smooth operation of startups in the market.

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Recently, with an aim to increase accessibility and to address the capital needs of companies by creating a separate exchange, an avenue for new-gen startup companies, SEBI re-worked the framework for Innovators Growth Platform (IGP) under the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 that aimed towards reducing the time, from two to one year for the early-stage investors to hold 25 per cent of pre-issue capital and allowing IPO-bound startups to allocate up to 60 per cent of the issue size to any eligible investor with a lock-in of 30 days on such shares.

Under the SEBI's IGP framework, startup companies that have given superior voting rights equity shares to promoters and founders will be permitted to list. The term "accredited investor" for the purpose of IGP is renamed as IGP Investors. Further, considering the emerging start-up ecosystem, this is aimed at making the platform more available to businesses, SEBI has relaxed the threshold limit for open offers from 25 per cent to 49 per cent and clarified the scope and responsibilities of the Alternative Investment Fund (AIF) Manager and members of the investment committee.

Presently, for a company not satisfying the conditions of profitability, net assets, net worth, etc., migration from IGP to Main Board requires such a company to have 75 per cent of its capital held by QIBs as on date of application for migration. This requirement is now reduced to 50 per cent. Delisting under the IGP framework shall be considered successful if the post-offer acquirer/promoter shareholding, taken together with the shares tendered and accepted, reaches 75 per cent of the total issued shares of that class; and at least 50 per cent shares of the public shareholders are tendered and accepted. Further, for delisting under the IGP framework, the Reverse Book Building mechanism shall not be applicable, and for computation of offer price, the floor price will be determined in terms of Takeover Regulations, 2011, along with delisting premium as justified by the acquirer/promoter.

SEBI had earlier, in 2015, released the SEBI (Issue of Capital and Disclosure Requirement) (Fourth Amendment) that enabled the Institutional Trading Platform (ITP) with a vision to facilitate the listing of coming age startups. The legal framework for such listing and trading of the specified securities on the ITP was laid down under the SEBI (Listing of Specified Securities on Institutional Trading Platform) Regulations, 2013. The ITP aimed towards connecting growing businesses to a pool of dedicated investors while also offering a wide variety of exciting investment opportunities to investors. Through the ITP process, SMEs and startups received wider visibility and were allowed to raise capital through trading of specified securities without having to go through the lengthy and complex IPO process.

In terms of providing greater flexibility to venture capital funds, SEBI has removed the list of restricted activities or sectors from the definition of "venture capital undertaking" as a ""domestic company which is not listed on a recognized stock exchange at the time of making an investment" and further proposed to change the alternate investment funds regulations by providing the definition of Start-up as proposed by the government to boost the current investment rate by angel funds in the startup market.

At present, SEBI is considering revising the framework to promote domestic listings and plans to build specific rules on Special Purpose Acquisition Companies (SPAC) to allow non-operational entities to go for funding for their initial shares and to list locally. This timely step taken by SEBI with respect to the promotion of SPACs in the Indian market helps to facilitate and ease the listing of startups.

The new changes proposed by SEBI have improved the regulatory regime for startup governance in the country and positively impacted the business side of these entities through relaxed and eased-out norms. The new norms have seamlessly found a way into the startup ecosystem in the country and enable the smooth functioning of start businesses in the country. Furthermore, with the above notifications, SEBI has intended to provide comfort to the operations of AIF Managers and venture capital funds in the Indian market.