Full disclosure

Faced with the trend of innovative startups in India bypassing the primary markets to list overseas, the Securities and Exchange Board of India (SEBI) promised to ease the entry norms for such startups on the domestic bourses. But the discussion paper floated by SEBI to facilitate this suggests that it isn’t very clear about its policy objectives. If the idea behind encouraging startup listings is to resuscitate the moribund primary market, the decision to allow them only on the Institutional Trading Platform for SMEs doesn’t make sense. The minimum investment size of ₹10 lakh on this platform is bound to keep out retail investors. If the objective is to open up more fund-raising avenues for innovator companies, this may not be served either, as these exemptions are to be granted only to ‘new-age’ companies belonging to the ‘knowledge-based technology sector’. There are quite a few innovative startups in manufacturing and services as well and there is no reason why they should be deprived of a friendlier listing regime. Today, e-commerce and technology ventures, even if unlisted, have a long line of investors ranging from global hedge funds to angels waiting to fund them. It is small enterprises in other sectors which are hard-pressed to find equity funding.

Indeed, most of the proposed tweaks to SEBI’s disclosure norms seem to be designed to accommodate the ‘special’ needs of e-commerce startups. For these startups, SEBI proposes to do away with the requirements that promoters hold a minimum 20 per cent of the post-issue capital and lock in their shares for three years. Diluting the 20 per cent promoter holding rule makes sense for any firm seeking to list, as there is no harm in a venture being collectively run by professionals or institutions. But the logic for shortening the lock-in period, which is meant to ensure a promoter’s skin in the game, from three years to six months, is unclear. Also, SEBI wants to waive pre-issue disclosures on the objects of the issue, deployment of money and future funding plans, arguing that it is difficult for new-age tech companies to make such disclosures. This is specious reasoning as e-commerce and tech startups need to map out their business plans and financial needs as much as conventional manufacturing companies. Given their mounting losses, e-commerce startups need prodigious amounts of capital on an ongoing basis. Therefore, it is doubly risky for investors to fund them without a clear idea of their ongoing capital needs.

Overall, SEBI’s view seems to be that HNIs and institutions, presumed to be more ‘informed’ investors, can participate in risky tech star-ups on a caveat emptor basis. But an investor’s skill in assessing a new venture has little to do with affluence. Therefore, SEBI’s objectives may be better served by reviewing the entry norms for startups across sectors, while making sure that innovative ventures make full disclosures on their financial position and business plans. This will ensure that investors who have the appetite for funding risky early-stage ventures do so with their eyes open.

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