A slew of relaxation measures for startups as suggested by SEBI is expected to attract additional capital and open up exit options for investors.

On December 14, SEBI proposed a framework for listing on the Innovators Growth Platform (IGP). The genesis of IGP can be traced back to 2015, when SEBI introduced the Institutional Trading Platform (ITP) with a view to build a real-time, liquid public market platform for new economy companies both for raising funds as well as exploring exits.

As the ITP framework failed to take off, it got renamed to IGP. In an effort to kickstart this platform, and to ensure that investors and startups both gain, SEBI has proposed a set of actions .

A majority of these measures are aimed at deepening the capital ecosystem for startups as well as offer exits, which have been at the heart of investors hesitancy to commit larger capital into these businesses.

For example, SEBI has proposed a reduced holding period for pre-issue capital, providing Differential Voting Rights (DVRs) to promoters and allowing discretionary allotment to investors. The issue of DVRs assume significance as in the past some startup founders have had a bitter taste with investors.

Dual-class shares

C.R. Chandrasekar and Srikanth Meenakshi, founders of Wealth India Financial Services Private Limited that ran FundsIndia.com, were kicked off from the company following differences of opinion with the firm’s private equity investors, according to sources.

Dual-class shares with DVRs allow promoters and founders to retain management control of the company even when they don’t own a majority of the shares.

In 2004, Google went public with a dual-class equity share structure in which stock held by the founders had ten votes per share, while stock held by the public had one vote per share. “DVRs will protect the core investors interest in running the company and the proposal is in a good direction,” said D Chattanathan, Managing Director of Aryadhan Financial Solutions.

According to Amarendra Sahu, Co-founder and CEO of online home rental marketplace NestAway, this addresses capital constraint issues with scalable business models and opening up investment opportunities for non-institutional domestic investors while also ensuring promoters retain control of the company through DVRs.

Reducing holding period

Investors seem to agree that reducing the holding period for investors helps in times like this. "Any removal or shortening of the holding period means early exits for the investors and liquidity builds up," said Chattanathan.

Anup Jain, Managing Partner, Orios Venture Partners stated that AIFs are sophisticated investors and there is no need to have restrictions (like 6 months holding period post-issue). “A company listing on IGP is indicative of its confidence to attract new investors and thus, this event should be seen as a welcome event to provide liquidity for prior investors who have invested at an early stage bearing the entire risk," he said.

Deepak Gupta, Founding Partner, WEH Ventures is of the view that liquidity for startup investors remains a problem to be solved for the India venture eco-systems and this should help.

Total capital invested in startups H1 of this year dipped by 11 per cent to $4.1 billion, due to Covid-19 and clampdown on investments from China.

What has SEBI proposed?

  • To reduce the period of holding of 25 per cent of pre-issue capital of the issuer company to one year from current requirement of two years.
  • Issuer companies seeking listing under IGP should be allowed to issue Differential Voting Rights (DVRs) and Superior Voting Rights (SRs) equity shares to promoters and founders.
  • Listed companies on the IGP should be allowed to allocate up to 60 per cent of the issue size on a discretionary basis prior to issue opening for subscription.
  • Accredited investor's pre-issue shareholding should be considered for the entire 25 per cent of the pre-issue capital of the issuer company.
  • Exempt Alternative Investment Fund (AIF) Category II investors frompost issue lock-in requirement of six months, subject to certain conditions.
  • Family trusts should be included in the definition of Accredited Investors.
  • Threshold trigger for open offer may be relaxed from the 25 percent to 50 per cent.
  • Delisting may be considered if 75 per cent of the total shareholding and voting rights are acquired against the present requirement of 90 per cent.
  • IGP company can migrate to the main board provided 40 percent of its total capital as on the date of application of migration is held by QIBs as against the present criteria of 75 per cent.
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