Vide Amendments to the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations 2009 (“ICDR Regulations”), SEBI (Merchant Bankers) Regulations 1992, the SEBI (Foreign Institutional Investors) Regulations 1995, SEBI (Venture Capital Funds) Regulations 1996, SEBI (Substantial Acquisition of Shares and Takeover Regulations 1997 and the SEBI (Stock Brokers and Sub-brokers) Regulations 1992, an Institutional Trading Platform (“ITP”) was opened up. Provisions for ITP and related matters are retained in Chapter X of the ICDR Regulations 2018. ITP is a trading platform in a Small and Medium Enterprises (“SME”) Exchange for listing and trading of specified securities of issuers who compliant with the eligibility criteria prescribed in Regulation 288 of the ICDR Regulations, 2018 therein.
ITP is a platform for issuers who are enterprises intensively using technology, information technology, intellectual property, data analytics, biotechnology or nano-technology to provide products, services; business platforms with substantial value addition. SEBI had constituted a working group to consider the viability of ITP, its success and failure as well as reforms to revamp it. The Group’s recommendations to SEBI contain sweeping policy changes. In its first, the platform is proposed to be renamed as ‘Innovators\ Growth Platform’ (“IGP”).
Presently in order for an issuer to be eligible to list, at least twenty-five per cent of such an enterprise’s pre-issue capital has to be held by Qualified Institutional Buyers (“QIB”) on the date of filing of draft information document or the draft offer document with SEBI as the case may be. Other issuers are also permitted to list here so long as on the date of filing of draft information document or draft offer document with SEBI, it maintains at least fifty per cent of the pre-issue capital being held by QIBs. In reference to the former, it has been proposed that to determine eligibility of issuer on ITP, the 25% stake requirement for (a) QIB would have to be maintained for two years before the date of filing and would take within its sweep (b) other regulated entities such as Category III Foreign Portfolio investors, family trusts with minimum net worth of INR Five hundred crore as well as Pooled Investment Funds[1] with minimum AUM of USD 150 Million. (c) Accredited Investors would require holding 10% at the least. (Accredited Investors would have to be recognized by Exchanges/Depositories and in terms of the Regulations refers to any individual with a total gross income of INR 50 Lakhs annually and minimum liquid net worth of INR 5 Crore or a body corporate with a net worth of INR 25 Crore.)
Per the extant law, no person, individually or collectively with Persons Acting in Concert (“PAC”) can hold twenty-five per cent or more of the post-issue share capital in the issuer entity. It has been proposed to remove this separate capping of post IPO shareholding.
An issuer can also list without making a public offer, in this regard, he has to file a draft information document along with other necessary documents with SEBI in accordance with the Regulations. In this regard, it exempts the issuer entity from compliance with the Chapter of the Regulations on Initial Public Offer on Main Board. The Issuer requires an in-principle approval from the stock exchanges on which it proposes to list itself. The Regulations provide exemptions to such issuers on receipt of the in-principle approval from the requirement of a minimum offer to public provisions for the limited purpose of listing on the institutional trading platform.
Where the issuer lists pursuant to an Initial public offer (“IPO”), the minimum application size prescribed is INR Ten Lakh. It has been proposed that the minimum application size in the secondary market be INR 2 Lakh and in multiples thereof. The allotment of IPO presently requires at least two hundred allottees which has been proposed to be reduced to fifty allottees. The allocation of the net offer to the public category has to be such that seventy-five per cent to institutional investors (with no separate allocation for anchor investors) on a discretionary or a proportionate basis and the rest twenty-five percent allotment to non-institutional investors on a proportionate basis. No one institutional investor can be allotted more than ten percent of the issue size. If there is any under subscription in the non-institutional investor category, the same will be available for subscription under the institutional investors’ category. The proposal notably suggests the removal of such allocation altogether and prescribes a general allocation on a proportionate basis.
The extant regulations, prescribe a lock-in period of six months from the date of allotment in case of listing pursuant to a public issue or date of listing in case the listing is without public issue.[2] The proposal would mean a uniform applicability of the lock-in period to all categories of pre-IPO public shareholders. This would not only require less work but also remove a condition, purpose of which has become repugnant and removal of which would only make it easier for issuers to participate on the platform. The size of trading lot on the stock exchange has been also been proposed to be reduced from INR 10 Lakh to INR 2 Lakh which may it easier for issuers to raise funds on ITP.
The Regulation provides that issuers whose securities are trading without making of a public offer issuer can exit the platform with shareholders’ approval of such exit by special resolution through postal ballot with ninety per cent of the total votes and majority of non-promoter votes are case in favor of such proposal and an approval of the stock exchange of listing. The Report could have gone into an alteration of the required per cent approval, which it did not.
A noteworthy proposal is to designate the IGP as mainboard platform for startups with an option to trade under the general category on completion of one year of listing. This might create some difficulties amongst the investors who invest in ITP issues in the context of recognizing the purpose of the issue.
Another significant change in terms of determining minimum offer to public, the proposal recommends should be in compliance with Minimum Public Shareholding Norms and minimum offer size to be INR 10 Crore.[3]
The proposed changes in terms of creating a uniform lock-in cap would be a positive step forward, however, deleting the separation of institutional and non-institutional investors while allotting and also establishing a uniform method of allotment i.e. proportionate basis by an elimination of discretionary basis is worth an analysis of whether or not discretionary basis of allotment serves its purpose. It has to be noted that while discretionary allotment to QIB permits issuers to analyze the purpose of investment, term of investment of the QIB and analyses which QIB would be best suited for the issuer, in the long run, proportionate allotment might be detrimental to issuers who would lose the opportunity to assess qualitative factors and leveraged QIBs.
[1] Such pooled fund would have to be registered with a financial services regulator in the jurisdiction of which it is resident and such financial services regulator should either be a signatory to IOSCO’s Multilateral MOU or Signatory to Bilateral MOU with SEBI and cannot be a resident of country identified in the public statement of the Financial Action Task Force (“FATF”) as a jurisdiction having strategic Anti-money laundering or combating the financial terrorism deficiencies or has not committed to an action plan developed with the FATF.
[2] With an exemption of this lock-in period provided to employees under employee stock option or employee stock purchase scheme, where equity shares are held by employee stock option trust or are transferred to the employee pursuant to the exercise of the option on employees’ end, equity shares held by VCF or AIF category I or an FVCI as also to persons holding equity shares (other than promoters) continuously for a period of more than one year prior to date of listing or the date of allotment.
[3] https://indiacorplaw.in/2017/10/sebi-circular-minimum-public-shareholding.html.