SEBI’s Overhaul of the Institutional Trading Platform to Facilitate the Start-Up Culture in India
Author: Shauree Gaikwad, Third year B.A. LL.B.(Hons.) student at Maharashtra National Law University, Aurangabad.
Securities and Exchange Board of India (“SEBI”) has approved the much needed amendments in relation to Institutional Trading Platform (“ITP”) under SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 (“ICDR Regulations”). SEBI introduced ITP in 2015 with a vision to facilitate listing of start-ups in India. But due to stringent regulations and restrictions on part of the ICDR Regulations, they failed to make SEBI’s vision into a reality. These restrictions were restrictions on promoter/individual shareholdings in the post-issue share capital of the company, mandatory investments by qualified institutional buyers in the pre-issue share capital of the company, high thresholds for allottees etc.
Therefore, after recognizing the need to fix these issues relating to the ITP Platform, SEBI constituted a committee in June 2018 which included the National Stock Exchange of India Ltd., merchant bankers, Indian Software Product Industry Round Table, the Indus Entrepreneurs, and the Indian Private Equity and Venture Capital Association as its members.
Key Proposals Approved by the SEBI
The key proposals of this committee which have been approved by the SEBI have been given below.
1. Change in the name of the platform
SEBI accented the proposal to rename Institutional trading Platform (“ITP”) as Innovators Growth Platform (“IGP”). This change was made in order to differentiate the platform and give it recognition of being a platform for start-ups.
2. Widening the criteria for eligible investors
According to ICDR Regulations, only the business entities who are intensive in the use of technologies such as nanotechnology, information technology and biotechnology, data analytics, the intellectual property shall be eligible to list on the IGP. These entities will be referred to eligible entities further.
Under the ICDR Regulations, at least 25% of the pre-issue capital of these eligible entities should be held by QIBs. Hence, QIBs were the only investors who were eligible to invest in the eligible entities. SEBI has accepted the proposal to widen the eligibility criteria for investors who can invest in eligible entities. Thus, the eligible investors according to the new criteria are:
(ii) Category III Foreign Portfolio Investors
(iii) Accredited Investors ("AIs") (Provided not more than 10% of the pre-issue capital is held by AIs). AIs have been defined to include: (a) any individual with a total gross income of INR 5,000,000 annually and who has a minimum liquid net worth of INR 50,000,000 or (b) Any body corporate with a net worth of INR 250,000,000.
(iv) Family trusts with net-worth of more than INR 5,000,000,000.
(v) A pooled investment fund with minimum assets under management of USD 150,000,000.
3. Minimum Net Offer to the Public
The requirement of a minimum net offer to the public has been preserved in order for it to be in compliance with the minimum public shareholding norms i.e. 25%. The minimum offer size proposed is INR 100,000,000.
4. Reduction in the time period of IGP’s migration to the main board
IGP is meant to be a temporary arrangement for the listing of start-ups until the time they fulfil the eligibility criteria of the main listing boards. SEBI has accepted the proposal to shorten the migration period from three years to one year, subject to compliance with the eligibility requirements of the stock exchanges. This move would be beneficial to the start-ups who are aiming to list on the main listing boards.
5. Removing the minimum reservation criteria of allocation to a specific category of investors
Currently, under the ICDR Regulations, the mandate for institutional investors is different from that of non-institutional investors. The mandate for institutional investors is 75% and for non-institutional investors, it is 25%. This mandate and specific categorization were hindering the potential growth of the platform especially with IGP being at its budding stage.
These specific categories which differentiated between institutional and non-institutional investors has been done away with, hence removing the 75% and 25% criteria for investors. This will allow the SEBI to see and analyze the type of investors which are being drawn to the platform.
6. Removing the restriction on post-issue shareholding
Currently under the ICDR Regulations, there is a mandate which restricts post-issue shareholding of individuals or persons acting in concert as 25% of the share capital of the Company. This 25% cap on post-issue shareholding has been now done away with, thus allowing the interested promoters of the start-up to continue to retain a larger share of the company.
7. Reduction of the minimum number of allottees and minimum application size
The minimum number of allottees has been reduced from 200 to 50 and the minimum application size has now been reduced from INR 10,00,000 to INR 2,00,000. This change has been made in order to attract start-ups to list itself on the IGP.
Even though SEBI aims to give recognition to IGP as a dedicated growth platform for start-ups, it ultimately makes the IGP a temporary arrangement and not a permanent listing platform for start-ups as its ultimate aim is the migration of start-ups to the main listing boards. SEBI should rather have made IGP as the main listing board for start-ups so as to maximize IGP’s potential as a self-sufficient platform as well as attract more investors and start-up to the platform. When it comes to IGP, SEBI could have taken a cue from the USA which has an independent platform for start-ups such as NASDAQ, which has over 3000 start-ups listed. IGP could have been shaped up to be equivalent to NASDAQ and should have been made main listing platform for start-ups instead of a temporary one. Having said that, acceptance of these proposals by SEBI has been welcomed by investors and start-up community. IGP can facilitate the start-ups by providing a timely solution to the funding problems that it currently faces, thus encouraging raising more capital from investors while providing a bankable exit option to early-stage investors.