Certain start-ups, such as Infibeam Incorporation Limited and Quick Heal Technologies Limited, both of which went public in 2016, directly listed on the main market, irrespective of stricter disclosure and other requirements applicable to the main market listings. While this option exists and the current market environment is encouraging, the majority of early stage companies in India still find a main market listing challenging.
Others, such as MakeMyTrip Limited and Yatra Online Inc., have in the past externalized their capital raising initiatives and listed on foreign bourses rather than on the Indian stock exchanges. Many companies continue to explore capital raising avenues overseas, including through offshore holding companies and special purpose vehicles. While certain sectors see better valuations overseas and globalization allows such companies to tap a deeper pool of capital overseas, this trend is of concern when it represents the inability of an Indian company to find investor interest and market depth in our own country.
SEBI’s Primary Market Advisory Committee (PMAC) is the apex advisory body for policy issues relating to the primary market. It has representation from investment banks, credit rating agencies, stock exchanges, academic institutions and investor associations. In 2016, the PMAC, chaired by Mr. T.V. Mohandas Pai, recommended to SEBI that alternate listing of start-ups be discarded and these companies be provided with a platform to list on the main market, with relaxed regulations. Further, in June 2017, it was reported that SEBI may be contemplating the removal of the lock-in requirement in its entirety.
On July 29, 2016, SEBI issued a discussion paper to review the ITP framework, based partially on the recommendations of the PMAC and further discussions with various stakeholders. SEBI’s focus on encouraging emerging companies in the technology space to utilize the ITP is illustrated by the proposal to rename Chapter X-C of the SEBI ICDR Regulations from ‘Listing on Institutional Trading Platform’ to ‘High-tech Start-up & other new business Platform’.
Among other things, SEBI proposed the following measures:
- Relaxation of the eligibility requirement for a minimum prior holding level by Qualified Institutional Buyers (QIBs) in the pre-issue capital of companies seeking to list on the ITP, to also include prior shareholding of other categories of institutional investors (including family trusts with a net worth exceeding Rs 500 crores, and certain entities registered with or regulated by SEBI, the Reserve Bank of India, or the appropriate overseas regulator), albeit not registered as QIBs.
- A uniform eligibility requirement of a pre-issue institutional shareholding level of at least 25% across all sectors, instead of the existing differential requirement of at least 25% in technology related companies and at least 50% in other companies.
- Deletion of the eligibility requirement that no person, individually or collectively with persons acting in concert, shall hold 25% or more of the post-issue capital.
- Relaxation of the requirement to allocate at least 75% of the net offer to public institutional investors and the remaining portion of not more than 25% to non-institutional investors (NIIs), to instead allocate at least 50% to institutional investors and the remaining portion of not more than 50% to NIIs.
- Increase of the cap on discretionary allotment to individual institutional investors from 10% to 25% of issue size.
- New provision for compulsory market making for a minimum period of three years for an issue size of less than Rs 100 crores.
- A uniform period for lock-in of pre-issue capital across all categories of shareholders, for six months from the date of allotment in case of listing pursuant to public issue or date of listing in case of listing without public issue, instead of limited exemptions to the existing six-month rule, for shares arising out of employee stock option schemes and held by VCF/AIF Category I/FVCI in case of listing pursuant to an IPO.
- Reduction of the minimum trading lot from Rs 10 lakhs to Rs 5 lakhs.
While it appears from this discussion paper that SEBI is not immediately working towards dismantling the ITP framework in favour of relaxed main board listing requirements for start-ups, or exemption from lock-in requirements for start-ups, it is reported in the media that various stakeholders have reiterated those recommendations and made several related recommendations, including tax breaks for start-up listings, and crowd-funding in India, pursuant to a framework similar to the US Jumpstart our Business Startups Act, passed in 2012.
We stand at across roads today. In line with the agility associated with start-ups themselves, whatever policy and regulatory changes to the extant ITP and related framework SEBI may announce could be regarded as further course correction by our market regulator towards the same objective as before, namely, to boost listing and trading of start- ups in India. In the interim, companies continue to look offshore for capital raising opportunities, or to evaluate private equity options.
Many others are considering main market listings in India. To this last category, SEBI’s policy and regulatory moves towards increased transparency and efficiency in the main market provide a ray of hope. Recently announced SEBI reforms include easing of access norms for FPIs, extension of lock-in exemptions to Category-II AIFs as well, continuing reduction in the listing time line from T+6 eventually to T+2, and enhancing investor engagement through social and digital media, including e-IPOs.
In addition, in an effort to address concerns regarding poor price discovery and overvaluation, SEBI constituted the Committee on Fair Market Conduct in August 2017, under the chairmanship of Mr. T.K. Viswanathan, former Law Secretary, to recommend amendments to the SEBI (Prohibition of Insider Trading) Regulations, 2015 and SEBI (Prohibition of Fraudulent & Unfair Trade Practices Relating to Security Market) Regulations, 2003. This committee is man dated to suggest short and medium term measures to improve surveillance of markets and antifraud enforcement. These recommendations, once notified, may affect price discovery and liquidity for start-up listings, and the Indian capital market as a whole.
Although it may seem daunting to navigate the complexities of accessing the public market, there are compelling reasons for any emerging company as well as its shareholders to explore onshore as well as offshore listing options. The right intermediaries and advisors can help identify the most effective route and unlock the benefits to taking a company public, and the opportunities for growth post listing.
Monal Mukherjee, Partner, Shardul Amarchand Mangaldas & Co, writes this piece for FICCI’s CAPAM 2017 Knowledge Paper.