[The following guest post is contributed by Geeta Dhania, 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