Is the Alternate Listing Platform for Start-Ups Really an Alternative?

[The following
guest post is contributed by Geeta
, Partner and Abhyuday Bhotika,
Associate at Luthra & Luthra Law Offices. Views are personal.]
For any business to grow it is
pertinent that it has access to capital and is able to complete the capital
formation cycle. Companies should be able to access the funding they need for
their growth and the investors should be able to smoothly exit so that they can
reap the benefits of their investment and continue the investment cycle. One of
the most popular ways of accessing capital and also providing exit is through
an initial public offering (IPO). However, listing conditions and process for
the main board of the stock exchanges are sometimes not conducive to start-up
companies which do not possess the traditional business set up. Most of these start-up
companies operate in unconventional sectors and are typically loss making in
the initial years following incorporation. Their business line and the
objective for capital raising may not always find favour with the regulator. As
a result, many such companies eye the overseas markets which have an appetite
for their stock and also relatively relaxed regulations. MakeMyTrip Limited,
WNS Holdings Limited, SKIL Ports and Logistics are some of the India-based
companies that have listed in the overseas securities market.
The community of these start-up
companies is growing and positively impacting the economy. The Securities and
Exchange Board of India (SEBI) acknowledged the impact of this growing
community (around 3000 Indian start-up companies as it noted) and felt the need
to make the existing capital raising avenues amenable for accommodating a large
number of start-up companies. Accordingly, SEBI, in its board meeting
dated June 23, 2015 (SEBI Board Note) announced an amendment to the existing
institutional trading platform (ITP) to simplify and facilitate capital raising
by start-ups.
This is not the first attempt by SEBI
to provide an alternate listing platform. In 2010, SEBI introduced chapter X-B
in the SEBI (Issue of Capital and Disclosure Requirements Regulations, 2009
(ICDR) to provide a dedicated platform for enabling easier access to equity by
small and medium enterprises (SMEs). More recently, the ICDR was further
amended to introduce chapter X-C for facilitating the issue of capital by small
and medium enterprises on ITP of SME exchange without going through an IPO. The
drawback with chapter X-C was that while it facilitated listing, it neither
enabled public capital raising nor catered to the special needs of the start-ups.
SEBI’s Board Note proposes to address this by amending chapter X-C to
facilitate capital raising by start-ups. While the proposed amendments are supported
by a noble purpose, some of the proposed changes mentioned in the SEBI Board
Note do not seem very palatable.
To begin with, SEBI has made it clear
that the amended ITP platform is not meant for investment by retail investors.
Undeniably, SEBI needs to balance the growth of the securities market and the
protection of investors. However, in the regulator’s zeal to “protect” the
retail investors, such investors seem to getting edged out of many new products
introduced by SEBI in recent past such as real estate investment trusts and
infrastructure investment trusts. As a natural corollary, investment platforms
available to the retail investors are being truncated. Proscribing investment
with a view to protect is no protection indeed. The regulator should therefore
find a middle path for permitting retail participation while facilitating
listing of the start-ups.
Secondly, while the amendments to the
existing ITP platform are being touted as enabling capital raising by start-up
companies, the SEBI Board Note mentions that the offer document for such
listing would require pre-clearance from SEBI. This seems counterintuitive to
the purpose of this platform. The endeavour to simplify the framework of
capital raising and yet placing approval barriers is paradoxical.
Interestingly, platforms such as qualified institutions placements,
institutional placement programs and even the SME platform do not require
pre-clearance of the offer document with SEBI.
The new ITP platform is meant to be
accessible by only those companies which have substantial investment by
qualified institutional buyers (QIBs). Companies that are intensive in their
use of technology, intellectual property, data analytics, biotechnology, nanotechnology
to provide products, services or business platforms should have at least 25% of
the pre-issue capital being held by QIBs and all other companies should have at
least 50% of the pre-issue capital being held by QIBs to access the new ITP platform
for capital raising. No doubt, QIBs are sophisticated investors and
pre-existing QIB investments would lend certain credibility to such companies.
However, since the mandatory QIB shareholding levels are pegged rather high, it
is sure to leave out many start-up companies from being able to utilize the
amended platform. Curiously, apart from the QIB holding in the company, SEBI
has not prescribed any other eligibility conditions for these companies and the
use of phrase “intensive use of technology, information technology,
intellectual property” etc. can be subjective. We do hope that the final prints
of the amendment will provide more colour to these terms.
Finally, the decision of a company to
list its securities is influenced by many factors and the cost and process of
listing is an important one. SEBI has rationalized disclosures required in the
offer documents of these start-ups. It has done away with the limit on the
amount that can be raised for general corporate purposes. This is a welcome
change since the funding requirements of most of these new age companies may
not involve creating any tangible asset but activities like brand building or buying
software. However, while the disclosures on the group companies, litigations
and creditors can be based on a materiality threshold, the SEBI Board Note
suggests that full disclosures need to be made on the website of the issuer
which defeats the very purpose of materiality threshold. Thus, barring the
removal of cap on general corporate purposes, SEBI does not seem to have taken
any substantial steps to reduce the disclosure/compliance costs of smaller
companies accessing the capital markets. The SEBI Board Note indicates that
lock-in for pre-issue capital shall be for a period of six months from the date
of allotment uniformly for all categories of shareholders, this implies that
shares allotted under employee stock option plans would also be subject to
lock-in, which is however currently exempted under the extant framework for
main board listing.
Providing an alternative platform to
list is not a new concept in the international securities market. United States
(US), United Kingdom (UK), Hong Kong, Japan, Singapore and China, have all
provided an alternative platform for smaller companies to list. Most of the
international regulators who have provided an alternate listing platform have conferred
significant disclosure/process relaxations to enable smooth listing. The
Jumpstart Our Business Start-ups Act, 2012 (JOBS Act) in the US was enacted to
allow emerging companies to list on the stock market without complying with
detailed regulation and contains amendments of various securities regulations,
which are intended to help emerging growth companies by reducing the cost of
going public. To accomplish this goal, the JOBS Act makes certain disclosure
required during IPO process voluntary of emerging growth companies and phases
in certain ongoing regulatory requirement following the completion of the IPO.
Besides providing emerging growth companies with a set of more relaxed
disclosure requirements during and subsequent to an IPO, the JOBS Act eases
regulatory regime by providing for provisions as to “testing the waters” which
permits an emerging growth company to market the securities and gauge
investor’s interest before filing of initial registration statement and without
having to worry about the potential liability that may result from an improper
offer. The Shenzhen Stock Exchange opened the ChiNext, a platform for
high-growth, high-tech start-ups in 2009 with listing standards less stringent
than those of the main and SME boards of the Shenzhen Stock Exchange. As on
July 15, 2015, 484 companies were listed on ChiNext and since the introduction
of JOBS Act, of the approximately 660 companies that went public in United
States, over 500 completed IPO’s under the JOBS Act. In comparison on the even
date, only 38 companies are listed on the ITP platforms of BSE SME and NSE
Emerge. The minuscule number of companies listed on the ITP platform is an
indication that something is amiss.
Most of the regulators in the
international jurisdictions have gone through many rounds of trial and error to
find the right combination that works for the start-up companies in their
jurisdiction. The JOBS Act by curtailing the quantum of disclosures and
enabling easier access to capital markets seems to be of next generation compared
to the SEBI Board Note. While SEBI has been working to provide a viable
alternative listing platform, the effectiveness of the amended ITP platform is
yet to be tested.
– Geeta Dhania & Abhyuday Bhotika

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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