Globally various successful start-ups in the e-commerce, social media and mobile technology firms have been accessing the IPO market including international IPO markets for raising capital.
This hasn’t been true for India’s successful start-ups. Successful starts ups in India (such as Flipkart and OYO Rooms to name a few) have been raising capital through the venture capital/ private equity route and have constantly avoided the public market.
The Securities and Exchange Board of India (“SEBI”) conscious of this lack of interest in start-ups to access the public markets and worried that it may slow the development of the capital markets in India opened a platform in October 2013 called the Institutional Trading Platform or “ITP” exclusively for such start-ups and removed much of the red tape. However, as many of the protections for investors were removed, the SEBI ensured that only HNIs and institutional investors invested in companies listed on the ITP.
In June 2018, the SEBI constituted a group to study the ITP. Pursuant to the recommendations of the group the SEBI in December 2018 renamed the ITP as the “Innovators Growth Platform (IGP)”and revised various norms for listing on the said platform with an objective of facilitating the increase in the number of start-ups listing and accessing the capital markets in India.
The changes introduced by the SEBI include the following:
- SEBI reduced the requirement of pre-issue capital held by institutional investors to 25% from the earlier threshold of at least 50%. The SEBI said that such institutions holding at least 25% of the pre-issue capital should be invested in the company for a minimum of two years.
- SEBI has also facilitated firms to list on the IGP who have the backing of family trust with a net worth of at least Rs 500 crore, well-regulated foreign investors and a new class of ‘accredited investors’.SEBI will also allow tech firms to list on the IGP where such accredited investors hold pre-issue capital not exceeding 10%. These investors can be individuals with a total gross income of Rs 50 lakh per annum and minimum liquid net worth of Rs 5 crore, or a corporate body with a net worth of Rs 25 crore or above.
- SEBI also removed the clause that earlier disallowed any person — either individually or collectively with persons acting in concert — to hold more than 25% of the post-issue capital in start-ups. This is aimed at encouraging big-ticket investments from larger investors even after such companies are listed.
- SEBI has also reduced minimum application and trading lot size to Rs 2 lakh from an earlier requirement of Rs 10 lakh.
- In addition, the minimum offer size is fixed at Rs 10 crore and companies can now allot shares to a minimum 50 allottees as opposed to a requirement of a minimum 200 allottees stipulated earlier.
- The SEBI also relaxed the time period to one year for such start-ups if they choose to migrate to main board of the stock exchanges, as against a three year-listing time frame set earlier.
Though the relaxations in the listing norms introduced by the SEBI are commendable they must be analysed from a comparative perspective vis a vis accessing capital via the venture capital route. A successful start-up has numerous potential investors looking to invest and investment provisions under the Companies Act, 2013 are less complicated than the provisions of listing on the IGP. In light of the aforesaid it the IPO route via the IGP ( in its present avatar) may not, in my view, be accessed by start-ups as a primary option to raise capital.