On 30 August 2016, the Securities and Exchange Board of India (SEBI) issued a press release titled “SEBI Cautions Investors”. It covers various matters pertaining to the stock markets. One issue pertains to the question of leagues/ schemes/ competitions that may involve distribution of prize monies, which has been the subject matter of an earlier post on this Blog.
Another aspect of SEBI’s press release pertains to electronic platforms used by companies for the purpose of raising funds. The release states:
B. UNAUTHORIZED ELECTRONIC PLATFORMS
It has also come to the notice of SEBI that certain electronic platforms are facilitating fund raising on digital platforms like websites and other internet platforms, which are similar to the platforms of stock exchanges. These digital platforms are neither authorized nor recognized under any law governing the securities market. The electronic platforms are allegedly facilitating investment in the form of private placement with companies, as the offer is open to all the investors registered with the platform amounting to a contravention of the provisions of Securities Contract (Regulation) Act, 1956 (SCRA) and the Companies Act, 2013. Only recognized stock exchanges provide a platform where equity and other securities issued by companies are listed and traded in accordance with the provisions of the SCRA. The details of SEBI recognized stock exchanges are available on the SEBI website www.sebi.gov.in.
This warning strikes at the heart of equity crowdfunding whereby electronic platforms are utilized for fundraising by companies and also for trading of securities already issued. As a news report in the Economic Times indicates, a handful of electronic platforms facilitating equity crowdfunding already exist in India, and their continued operation may come under SEBI’s scanner given its new thrust towards curbing their efforts. The report also portends the downfall of the equity crowdfunding market in India.
SEBI’s restrictive approach towards fundraising through electronic platforms is not at all surprising. As Arjya Majumdar and I had examined in a recent paper “Regulating Equity Crowdfunding in India: Walking a Tightrope”, the current legal climate for equity crowdfunding does not facilitate the full utilization of that concept. This is due to the fact that the Companies Act, 2013 as well as the SEBI Act, 1992 carry considerably tight restrictions on the ability of companies (including private companies) to offer securities. These come on the back of episodes such as Sahara and others involving collective investment schemes. SEBI’s approach in this press release is consistent with our findings in the paper where we take a bleak view for the future of crowdfunding in India.
Although SEBI issued a consultation paper in 2014 to discuss the possibility of introducing a market for equity crowdfunding in India, there has been very little traction thereafter. Hence, unless there are significant legal and regulatory reforms, crowdfunding may not receive much impetus. While there is considerable emphasis on the “start up” sector in India, the possible adverse effects of crowdfunding on investor protection seem to constitute the higher priority of the regulators.