SEBI Consultation Paper on Crowdfunding

We have previously
discussed
the concept of crowdfunding and the broad nature of the legal
issues that it might give rise to. Essentially, crowdfunding that involves the
issue of securities (equity or debt) would attract the provisions of company
law as well as securities laws. While specific crowdfunding legislation has
been introduced in several countries (e.g. JOBS Act in the US), there has been
no specific legal reform in India. This despite some indication of crowdfunding
activity already having commenced in India.
Recognising the market realities and the need for
crowdfunding as a source of capital raising by small and medium enterprises
(SMEs), SEBI has issued a “Consultation
Paper on Crowdfunding in India
”. The paper is detailed and contains not
only a background discussion regarding the methods of crowdfunding but also a
comparative section on how it is regulated in several countries around the
world. It discusses the legal regime in India, which primarily consists of the
provisions of the Companies Act, 2013 and various SEBI regulations, including
the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009
(ICDR). Thereafter, SEBI has raised a number of open-ended questions inviting
suggestions as part of the consultation process.
While the crowdfunding mechanism requires companies
to be granted the ability to raise capital through private arrangements for
which they need to advertise through various means, primarily the Internet, this
approach generally tends to militate against the legal regime that usually
carefully circumscribes the manner in which companies can offer securities.
This is more so in the light of the new provisions in the Companies Act, 2013
relating to private placements, which arguably
overregulate such offers largely due to challenging episodes such as Sahara.
However, the provisions of the Companies Act do carve out certain exclusions
for offer of securities to qualified institutional buyers (QIBs), etc. It is
through the exploitation of these exceptions that crowdfunding can be carried
out in the Indian context without any legislative amendment and with the mere
intervention of SEBI through the issue of appropriate regulation.
It is not clear if the crowdfunding market in India
is yet at a stage when targeted regulation is mandated, but SEBI’s move to
begin consultation on this issue is welcome. However, SEBI has made it clear
that this is only an initial consultation process, and that there is no
certainty that a specific regulatory regime for crowdfunding will in fact be
introduced.

Comments
are due on the Consultation Paper by July 16, 2014.

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

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