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The minimum size of retail investment should be Rs.10 lakh and each trading lot Rs.5 lakh. These are the most visible points in the fresh proposals floated by the Securities and Exchange Board of India (SEBI) for capital raising by the so-called new age companies. These companies, dealing in e-commerce, start-ups and others, are unable to access domestic capital markets. Only two categories of investors — qualified institutional buyers (QIBs) and non-institutional investors — will be allowed to invest in these companies.
A discussion paper incorporating these and other points has been circulated for a wider discussion by the capital market regulator on March 30.
The rules seek to provide an alternative trading platform in the domestic stock exchanges for start-ups, e-commerce companies and product development companies. Ventures in this broad omnibus category aren't able to tap the Indian capital market through the conventional route of IPOs (like any other company). SEBI has recognised the needs of a number of start-ups and new age companies which want to raise money not for the conventional purposes of financing land, buildings, machinery and so on. Many of them may not have a dominant promoter. Difficulties in listing their shares have forced many of these companies to list on overseas exchanges. An alternative to overseas listing is what is contemplated. But to take advantage of the new dispensation, regulators, investors and capital raising companies will have to reckon with a new set of norms, which, though alien to the majority of stock-issuers, are part of the institutional trading platform, typically used for listing of medium and small enterprises.
Why should the start-ups and other ‘new age companies’ get a differential treatment from the regulators and the stock markets?
According to the discussion paper, the ‘unique’ nature of these companies is one reason for seeking differential treatment — basically relaxation of existing rules applicable to the rest — without which they may seek listings elsewhere.
Second, new age companies “having an innovative business model and belong to the knowledge-based technology sector, where no person (individually or collectively with persons acting in concert) holds 25 per cent or more of the pre-issue capital, may access capital through the institutional platform.
Three, their business model is completely different from that of many other companies listing in India. Their main objective is to grow in size rather than boost profits. Consequently, they incur losses even though many of them are bigger than the larger brick and mortar companies. For them, listing in the U.S. is the primary objective. In India, at present a three-year track record of showing profits is a pre-condition for a public issue.
Primary market rules will, therefore, be amended to permit even loss making companies to float an IPO, necessitates. Simultaneously, many categories of investors will have to be kept out. Accordingly, SEBI has suggested considerably marked up amounts for investors — a minimum investment size of Rs.10 lakh for retail investors and a minimum Rs.5 lakh for each trading lot.
The implication is that only well-heeled investors will be in a better position to appreciate the inherently higher risks that investments in these companies inherently entail.
In the main bourses, the minimum investment size varies but usually not more than Rs.10,000 to Rs.15,000. The extent to which promoter’s shares are to be locked in varies from three years in conventional issues to 6 months for start-ups.
Another important suggestion for the new age companies is that the disclosure norms should be less rigorous than they are for conventional share issuers. They need only to discuss the broad details of the share offering. This is in sharp contrast to “as wide a disclosure as is possible” insisted upon by SEBI for other companies. Again, today the prospectus accompanying an IPO should state specifically the purposes to which the money will be deployed. New age issuers need merely state that the money will be used for general corporate purposes.
The new rules for start-ups and other new age companies will be notified after the regulator receives sufficient feedback. They will most certainly be well received by market players. Yet, the feeling persists that while India will be making a good beginning in retaining the listings of start-ups much more needs to be done. One incentive for going abroad is the sheer size of the capital markets abroad. The new age companies require unconventional funding from a variety of providers, including private equity, dedicated funds and generally more sophisticate investors. Some of them invest for the long haul but many more are in these deals for the quick profits that are possible through mergers, acquisitions and private funding.
It is also time to remember that all of SEBI’s recent initiatives are for large investors. Retail investors deserve a better deal than what they have now. But that is another story.
(This article first appeared in The Hindu dated April 6, 2015)
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