SEBI Seeks To Give IPO-bound Startups An Easier Road

In a discussion paper issued on Thursday, the Securities and Exchange Board of India (SEBI)  has sought market feedback areas governing the existing framework on superior voting rights that is likely to give more flexibility to startup founders seeking to list publicly.

The paper covers points like the net worth requirement of promoters of companies looking to go for public offerings, the minimum holding period of SVR shares and structures eligible for SVR share issuance. The proposals have the potential to help founders dilute stakes without losing control, make tax structures more efficient and help in succession planning.

In March, SEBI decided to make the process of initial public offering (IPO) simpler for Indian startups, by easing the listing rules on the Innovators’ Growth Platform (IGP). IGP (formerly known as Institutionalised Trading Platform or ITP) was launched by the Indian government back in 2015 to allow the startups to list themselves for public trading. However, after receiving a lukewarm response from the Indian entities, SEBI has been relaxing its norms ever since 2018.

A number of Indian startups like Paytm, Zomato, PolicyBazaar, Nykaa and Delhivery are expected to initiate or complete their IPO this year. These startups may not reap the benefits of SEBI’s updates. The final date for submitting feedback to SEBI is July 30. 

The regulator is considering some relaxations such as doing away with timelines for founders to issue SR shares before an IPO. Currently, founders should issue SR shares six months before going public. SR shares can be issued only to founders who are not part of any promoter group whose collective net worth is INR 500 Cr.  This is ‘too onerous’ to comply with and is keeping prospective SR shareholders away from utilising the SR shares framework, it said.

“SEBI has received feedback from market participants on the current requirement that, an SR shareholder shall not be part of promoter group whose collective net worth is more than INR 500 crores, is too onerous to comply and is keeping prospective SR shareholders away from utilizing the SR shares framework ,” the regulator said in its latest paper.

One key concern regarding this clause is that family members of SR shareholders may also hold stakes in the company and such investments – as per current rules — would not be excluded while computing the collective net worth of the SR shareholder.

IndiaTech, an industry association working closely with startups on issues including SR shares, said Sebi’s reconsideration of clauses such as net-worth and timing of SR issuance is encouraging for the startup and tech ecosystem.

“While our recommendations around sunset clause for a period of 10 years plus 5 years post IPO is still to be considered, it (SR shares proposal) will be significant for the growth of any company in terms of operations, maintaining profitability, serving its investors and ensuring stability in management, especially for high-growth technology companies,” Rameesh Kailasam, CEO of IndiaTech was quoted as saying by ET.

Back in 2019, the market regulator removed the criteria that mandated no person individually or collectively with persons to hold 25% or more of the post-issue capital. Besides this, it also reduced the minimum application size from INR 10 Lakh to INR 2 Lakh, and removed minimum reservation.  The minimum number of allottees was also reduced from 200 to 50, and the trading lot went down to INR 2 Lakh from the initial requirement of INR 10 Lakh.

SEBI further announced new guidelines in September 2019 to allow startups to easily switch from Innovators Growth Platform (IGP) to main board trading. Under those rules, startups should have profitability of three years or at least 75% of its shareholdings with “qualified institutional investors (QIB)” for the option to trade under the regular category.

The guidelines also require promoters’ contribution, which includes offerings made by alternative investment funds, foreign venture capitalists, scheduled commercial banks, public financial institutions or insurance companies, to be 20% of the total capital. Moreover, the contributions should be locked in for a period of three years from the date on which the company is allowed to trade from the main board trading.