Institutional trading platform draws VCs

VCs, seed funds eye platform for transparent investments, exits

Early-stage investors such as venture capital (VC) funds and seed funds are eyeing the Securities and Exchange Board of India (Sebi)’s newly approved institutional trading platform (ITP) for exits or, at the least, more transparency and liquidity on investments.

In October 2013, the market regulator had allowed small and medium enterprises (SMEs) to list on the ITP without conducting an initial public offering (IPO) or raising capital from the public. The move was aimed at improving visibility and governance standards in such entities and providing an opportunity to their investors to exit.

Officials at venture funds, including those with government backing such as Small Industries Development Bank of India (Sidbi), IDBI Bank and Canara Bank, said they were already in talks with about three dozen companies in which they had investments to list on the ITP.

What is an ITP?

• A new exchange platform for start-up, SME listing
• ITP allows listing without an IPO or fund-raising
• Platform to help in price discovery, liquidity and creating visibility

Eligibility criteria

• Companies with revenues of less than Rs 100 crore
• Not having completed 10 years of incorporation
• Clean promoters and regulatory record

Trading conditions

• Only for institutional investors and HNIs
• Minimum lot size of Rs 10 lakh
• Raising of capital allowed through rights issue or private placement post-listing

The move, experts said, was to help investors save on tax while exiting their investments, along with providing other benefits such as more visibility and transparency. “If a VC exits its investment through ITP, it will just have to pay securities transaction tax (STT) and will save on long-term capital gains tax. This is a great incentive and that’s why a lot of such investors would like the companies to be listed,” said B Madhuprasad, vice-chairman, Keynote Corporate Services.

N K Maini, deputy managing director of Sidbi, which operates a VC fund, said the ITP was aimed at creating an active market to provide liquidity to small companies. “The platform should not become positioned only for tax benefits on secondary transactions. Ideally, platforms should also be seen by young entrepreneurs as places for raising fresh capital and exchanges should work towards achieving this to enhance the value of an ITP listing,” he said.

Sebi has laid down strict eligibility criteria for listing on the ITP —besides having a clean track record, such a company should have been incorporated less than 10 years ago and its revenue shouldn’t exceed Rs 100 crore. The ITP is meant for institutional investors and high net worth individuals only and the minimum trading lot size has been fixed at Rs 10 lakh.

The ITP, an extension of the SME trading platforms launched by stock exchanges, is yet to see its first listing. Officials at stock exchanges said the first set of listings might be recorded soon. “The response (to ITP) has been very encouraging. Several companies have shown interest. We are expecting a handful of listings this quarter. A few companies are working on their documents,” said Ravi Varanasi, who is heading the SME project at the National Stock Exchange.

“So far, three companies have filed information memoranda on ITP… Listing on ITP is likely to happen soon,” said a BSE spokesperson.

Sushil Muhnot, chairman and managing director, Bank of Maharashtra, said, “For this initiative to become reality, three issues have to be dealt with. First, SMEs should be made ready for listing. Second, gathering a set of investors to invest in SMEs and finally, the mechanism of market makers.”