Sebi to relax start-up net worth norms, allow listing on SME platform

Move follows failure of ITP to attract start-ups; many have raised money from PE investors and have much higher networth to qualify for the platform

Market regulator Securities and Exchange Board of India (Sebi) is planning to allow start-ups to list on the small and medium enterprises (SME) platform of the stock exchanges. Sources say start-ups will be given special relaxations on the SME platform in terms of net worth requirements and profitability. The move comes after Indian stock exchanges in coordination with Sebi held several discussions with both the industry participants and to come up with a new framework for start-up listing. The move comes after Institutional trading platform (ITP), a special segment for listing of new-age companies, failed to take-off.

Sources say the idea behind the move is to provide capital raising opportunities to small and mid level start-ups who cannot list on the main board for the higher compliance norms and at the same time are reluctant to consider ITP platform.  Although the ITP platform was designed to facilitate start-up listings, companies have not been keen due to several factors including liquidity on the platform. On the other hand, SME platform has been successful in catering to the capital requirements of small size enterprises with more than 200 listings till date.

As per the Sebi listing regulations, a company listing on the start-up platform can have a maximum networth of Rs 10 crore to qualify for an SME listing. However start-ups who have raised money from private equity investors have much higher networth to qualify for the platform. 

Since a large part of start-ups are either private equity (pe) or angel investor backed, the market regulator could also introduce the concept of professionally managed companies for SME segment. Such a tweak would enable pe investors and angel funds to get an exit through SME IPO without having to oblige with the compliance requirements of a promoter. Current rules need promoters to own atleast 20 per cent stake in the company and also mandates them to have minimum three years of experience in the same line of business.

“The discussions are currently in an advanced stage and we could expect an announcement in the next one month. Not just Sebi, even stock exchanges have reached out to the new-age companies seeking inputs. If the relaxations are provided, SME platform would emerge as a viable option for start-ups to raise capital,” said a source privy to the development.

ON THE CARDS

* Sebi to allow start-ups to list on the SME platform

* New-age companies to be exempt from maximum net worth norms of SME platform

* Since many start-ups are private equity or angel investor-backed companies, definition of professionally managed company to be introduced for SMEs

* This would relieve strategic investors from complying with requirements for promoters

* This step by Sebi comes after the ITP platform failed to take off due to liquidity concerns

Unlike the main board issuances, Sebi doesn’t directly regulate the SME IPOs. Under the Issue of Capital and Disclosure Requirements (CDR) regulations, stock exchanges have been vested with the powers to scrutinise and approve all the IPO documents of SMEs. The companies listed on SME platform also file earning results once in six months as against once in three months by the main-board companies.

Experts say, there are lots of start—ups in India who have genuine capital requirements. The issue is more relevant in the context of smaller start-ups where the big-ticket venture capitalist firms don’t invest. Many of such smaller start-ups are forced to shut down due to lack of financial resources.

“There are many start-ups who need growth capital. While bigger start-ups can always tap PE investors for further capital, smaller ones have limited options to raise capital currently. Providing a platform for them to list would be a positive step not just for these companies but also for the investors as they get an opportunity to be a part of the growth story,” said Harish HV, partner, Grant Thornton.

Sebi had come up with the ITP regulations in 2015 to facilitate listing of the new age companies. However the platform failed to attract companies due to compliance requirements and also concerns about liquidity in the platform. Also the fund raising scenario in the segment has also witnessed a drastic change. Back then, there was a flush of investments from PE and VC investors into start-ups. But things look different now as fresh investments have relatively dried up and the valuations of the companies has also come down due to lack to demand.