India’s start-up ecosystem continues to be the third largest in the world. With the improvement in digital connectivity and increased level of internet penetration, India presents a tremendous opportunity for the start-ups across the sectors including edtech, healthtech, retailtech, agritech, fantasy sports etc. The governments at the centre as well as at state level have come up with several regulatory relaxations and policy benefits to encourage the Indian entrepreneurs to focus on innovation and technology development. As a result of strong policy support and expansion of institutional support, the investment environment in India for start-ups continues to be positive and the Indian start-up ecosystem continues to grow at an incredible pace.
With the objective of facilitating the listing of new age start-ups on domestic exchanges, the Securities and Exchange Board of India (SEBI) had introduced the Institutional Trading Platform (ITP) in 2015 which was accessible to such companies which were intensive in their use of technology, information technology, intellectual property, data analytics, biotechnology, and nano-technology to provide products, services or business platforms with substantial value addition.
However, since the start-up ecosystem of India was not matured enough at that point of time and some of the listing norms were complex in nature, ITP failed to garner interest from Indian start-ups. Looking at the tepid response of start-ups, SEBI introduced several changes in the ITP framework in 2018 and relaxed various norms with a view to attract the start-ups besides renaming the ITP framework as Innovators Growth Platform (IGP). Despite the relaxations in listing norms, the IGP could not get any traction and no listing has so far taken place on the IGP platform.
A company which is listed on the IGP can migrate to the Mainboard of the stock exchanges provided that such company satisfies the conditions as prescribed under Chapter X of the ICDR Regulations.
IGP Framework
Chapter X of the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 (ICDR Regulations) sets out the provisions related to the listing of securities on IGP pursuant to an initial public offer or for only trading on a stock exchange without making a public offer. An entity seeking to list its securities on IGP has to fulfil certain specified criteria before it becomes eligible for listing its securities on IGP.
As per the extant framework, at least 25% of the pre-issue capital of the issuer company needs to be held for a minimum period of two years by (a) Qualified Institutional Buyers (QIBs) (such as mutual funds, venture capital funds, scheduled commercial banks, public financial institutions etc.), (b) family trusts with a net worth of more than INR 5 billion, (c) Accredited Investors[1] (AIs) and/or (d) regulated entities (including foreign portfolio investors and pooled investment funds), provided that AIs are not allowed to hold more than 10% of the pre-issue capital of the issuer company.
A company which is listed on the IGP can migrate to the Mainboard of the stock exchanges provided that such company satisfies the conditions as prescribed under Chapter X of the ICDR Regulations.
Consultation paper on review of the IGP framework
Based on suggestions and feedback received from start-ups and market participants, SEBI has, on 14 December 2020, issued a consultation paper[2] to further review the IGP framework and has sought comments from the public and other stakeholders. Set out below are the key changes as proposed by SEBI in the consultation paper.
- Minimum holding period for pre-issue shareholding: SEBI has proposed to reduce the minimum holding period for pre-issue share capital by eligible investors from the existing two years to one year. This relaxation is expected to help start-ups attract more investors and seek early listing on IGP since the start-ups would not have to wait for the minimum holding period of two years to be over before it may initiate the listing process.
- Lock-in of post-issue capital: As per the extant framework, the entire pre-issue capital of the shareholders needs to be locked-in for a period of six months from the date of allotment in case of listing pursuant to a public issue or date of listing in case of listing without a public issue. However, this condition is not applicable to the equity shares held by a venture capital fund or category I alternative investment fund (AIF)[3] or a foreign venture capital investor subject to the condition that such equity shares have to be locked-in for a period of at least one year from the date of purchase by such investors. SEBI has proposed to extend this relaxation from lock-in requirement to the pre-issue shareholding of Category II AIF[4].
- Pre-issue shareholding of AIs: It has been proposed that the extant limit of 10% on pre-issue shareholding of AIs should be removed such that the AIs may become eligible to hold up to 25% of the pre-issue share capital of the issuer company. Further, SEBI has proposed to clarify that the pre-issue capital held by promoters/promoter groups, even if they are registered as AIs shall not be considered for the said minimum 25% eligibility requirements.
- Differential voting rights (DVR)/Superior voting rights (SR) equity shares: As per the extant provisions of the ICDR Regulations, where an issuer company has issued SR equity shares to its promoters/founders, such issuer is allowed to make an initial public offer of only ordinary shares for listing on Mainboard subject to certain conditions. However, the IGP framework does not have a similar enabling provision. Therefore, SEBI has proposed that in line with the provisions for the technology-based companies seeking a listing on Mainboard, the IGP framework may also permit the issuer companies to issue DVRs/SRs to the promoters/founders.
- Continuing special rights: Special Rights (such as board seat and veto / affirmative voting rights) of investors collapse upon a listing event and the shareholders' approval is required to reinstate any of these special rights. SEBI has proposed to allow the continuation of specifically defined special rights for investors holding in excess of 10% of capital. However, such special rights may not be open ended and there should be adequate checks and balances and a sunset clause.
- Higher threshold for mandatory open offer: The extant takeover regulations stipulate a threshold of 25% shares or voting rights for triggering the mandatory open offer. In view of the fact that the start-ups continuously need capital for their expansion plans and also that the strategic investors may like to take higher stakes in the share capital of start-ups, it has been proposed to set a higher threshold of 49% for triggering of a mandatory open offer under the takeover regulations in case of companies listed on IGP. Any change in control irrespective of the percentage of acquisition would continue to be a triggering point for the mandatory open offer.
- Conditions for voluntary delisting: Any company intending to delist its shares from the IGP platform is required to comply with the SEBI (Delisting of Equity Shares) Regulations, 2009, which would involve among others process of reverse book building including exit price as determined through such process, bidding of minimum 90% shareholding/voting rights etc. It has been proposed, inter alia, that (i) voluntary delisting of companies from IGP should require acquisition of minimum 75% (instead of 90%) shares; (ii) the shareholders’ resolution for voluntary delisting should require the consent of the majority of minority shareholders (as against 2/3rd public shareholding), and (iii) since reverse book building may be too onerous for start-ups, the delisting price may be based on floor price plus an additional delisting premium. The acquirer will have to justify the delisting premium.
- Migration to Mainboard: A company listed on IGP is required to satisfy the prescribed criteria of profitability, net worth, net assets etc., as required under the ICDR Regulations in order to migrate to the Mainboardof stock exchange. If such a company does not fulfil such criteria, it may still migrate to the Mainboard provided that at least 75% of its total share capital as on the date of application of migration to the Mainboard is held by QIBs. Considering that the threshold of minimum 75% post-issue shareholding of QIBs is very stringent given the category of investors on IGP platform, it has been proposed to reduce the said threshold from existing 75% to 40%.
Comments
SEBI’s consultation paper is yet another attempt to facilitate the listing of start-ups. The consultation paper seeks to harmonise several provisions of the IGP framework with the provisions applicable to the Mainboard of stock exchanges.
While holding above 25% of the pre-issue capital was not a matter of concern for the eligible investors, the two years holding period was difficult to meet for the investors since they just want regular exits from the start-ups.
Due to its size and the endless opportunities in the Indian market, India continues to be a preferred investment destination for many venture capital/private equity investors who are looking to invest in technology based businesses. While the COVID-19 pandemic has hit the start-ups (especially the early stage start-ups) very badly, still the Indian start-ups have managed to attract a large number of investors and secured significant investments in the year 2020.
However, the Indian start-up ecosystem is still developing and there are several hurdles which are faced by the Indian entrepreneurs before their ventures become successful. The governments and the regulatory authorities are taking various steps to help the entrepreneurs and promote the start-up culture in India. The consultation paper issued by SEBI appears to suggest that SEBI understands the struggle of start-ups to go public and provide exits to its investors; hence, it has proposed necessary amendments so as to transform the listing framework for start-ups.
While holding above 25% of the pre-issue capital was not a matter of concern for the eligible investors, the two years holding period was difficult to meet for the investors since they just want regular exits from the start-ups. Another step in the interest of a larger number of minority shareholders is the proposal on the continuation of special rights such as board seat and veto or affirmative voting rights for existing institutional investors. This would not only allow investors to continue their role in matters such as capital allocation, operating frameworks, business model etc., but would be significant in the growth of start-ups. Also, the proposed relaxations in takeover norms and delisting provisions are a welcome step. These proposed amendments, if implemented, should encourage the Indian start-ups to opt for listing on IGP.
Disclaimer: This publication is not intended to be a comprehensive review of all developments in the law and practice, or to cover all aspects of those referred to herein. This publication has been prepared for information purposes only and should not be construed as legal advice. Although reasonable care has been taken to ensure that the information in this publication is true and accurate, such information is provided ‘as is’, without any warranty, express or implied, as to the accuracy or completeness of any such information.
Authors:
Dinesh Gupta,
Associate Partner
Harshita Arora,
Associate
[1] As per the extant framework, (a) individuals with total gross income of INR 5 million and with a minimum liquid net worth of INR 50 million, or (b) body corporates having net worth of INR 250 million, shall be eligible to be considered as AIs. The persons /corporate bodies who wish to get accreditation for the purpose of IGP would need to approach the stock exchanges or depositories and follow the prescribed procedures.
[2] The consultation paper may be accessed at the following link:
[3] "Category I AIF" invests in start-up or early stage ventures or social ventures or SMEs or infrastructure or other sectors or areas which the government or regulators consider as socially or economically desirable and shall include venture capital funds, SME Funds, social venture funds, infrastructure funds and such other AIFs as may be specified.
[4] Various types of funds such as real estate funds, private equity funds (PE funds), funds for distressed assets, etc. are registered as Category II AIFs.
