The Efficacy of a Listing Platform for Start-Ups

Last week, SEBI issued a discussion
paper
on “Alternate Capital Raising Platform and Review of Other Regulatory
Requirements”, which is aimed at providing start-up companies the facility of
listing their securities on a trading platform without going through the
extensive onerous and listing requirements that might be applicable in the
normal course. This is explicit recognition of the need to providing additional
avenues to start-ups and small businesses to raise capital, and also to stem
the tide of Indian companies approaching overseas markets for listing their
securities. The purpose of this post is to highlight the key proposals made in
the discussion paper, comments on them and conclude with some overall
observations on the likelihood that these proposal will be effective to the
desired extent.
The idea appears to be to ease the
various requirements for an IPO when it comes to start-ups. Since there is no
clear definition of what a “start-up” is, the discussion paper clarifies that “the
new platform for raising money within the country will be initially made
applicable to companies which are in the area of software product development,
e-commerce, new-age companies having innovative business model, etc. which
create new business opportunities or which serve important efficiency
enhancement in existing business activities.” For such companies, the concept
of promoter lock-in is proposed to be relaxed given that there may be no single
person that holds a significant number of shares. Hence, the entire pre-issue
share capital is to be locked in for a period of 6 months. Similarly, there
will be complete freedom for start-ups in raising capital for any objective,
including for general corporate purpose. Failing this, start-ups would find it
difficult to come out with detailed plans for utilization of funds given that
the business plan may not have been crystallized yet as the product or service
would be at an early stage of development.
Under this proposed arrangement,
considerable leeway will be provided to start-ups when it comes to disclosure
in the offer document. The disclosure requirements for basis of the issue price
could expansive and could include information other than those prescribed in
detail for companies in general. Similarly, other disclosures which are
considered costly and cumbersome are minimized for start-ups. Such disclosures
include those pertaining to group companies, litigation and creditors. The purpose
of these relaxed measures appear to be to ensure that the onerous disclosure
requirements applicable to companies in general do not operate as a deterrent
to start-up companies.
Due to the relaxations in the
disclosure and the IPO process, start-ups can avail of this facility to issue
shares only to sophisticated investors such as qualified institutional buyers
(QIBs) and non-institutional investors (NIIs). Also, minimum application size
and allotment requirements would ensure that only sophisticated investors can
participate. Effectively, this facility would not be available for investment
by retail investors.
Overall, this facility would
provide additional access to capital for start-ups who may not be ready to go in
for a full-blown IPO and listing on the main platform. Also, this may also be a
good alternative for start-ups who may not want to access angel funding or
venture capital as such investors would normally seek additional contractual
protection and control rights. Investors investing through an IPO listing on a
start-up platform may not avail such additional rights, thereby providing flexibility
to the management.
At the same time, how effective
this mechanism will be remains open. Given that only sophisticated investors
can invest, the market may be somewhat restricted. Moreover, this would likely be
an interim arrangement for issuers, and if start-ups grow beyond a certain
size, they will nevertheless have to list on the main platform after
undertaking the full-blown listing and disclosure requirements. Also, there may
be other reasons for start-ups to want to list overseas, for example to obtain better
international exposure and build up greater trust and credibility with its
global clientele. Hence, while the proposals in the discussion paper are useful
and will aid the progression of the start-up environment in India, the extent
of its impact remains to be seen.

Finally, it is not clear as to what
the ongoing obligations post-listing would be. For example, if there are
onerous governance obligations on the start-ups, that might add to the
continuing cost of listing and may deter start-ups. At the same time, there
would have to be some minimal corporate governance measures embedded in the process
so as to protect investor interests.

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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