Crowd-funding not for the crowd

Sebi's draft norms requiring use of demat accounts could exclude 90 per cent of potential investors

The Securities and Exchange Board of India’s June 17 consultation paper on crowd-funding regulations might exclude many potential investors from this nascent capital-raising avenue.

The paper aims at a framework for crowd-funding, a process of raising capital using web-based portals including social media, now catching on in India. Draft regulations envisage all such transactions through a demat account, currently used primarily to hold share certificates in electronic form. There are currently about 21.9 million such accounts in the country.

“The issue has to be in demat form; thus, all the accredited investors need to hold a demat account,” said the Sebi discussion paper.

GOING DIGITAL

• Crowd-funding is a means of raising capital from individuals using internet-based platforms and social media
• Sebi came out with a paper with draft regulations on crowd-funding earlier in the month
• The draft norms say crowd-funding for financial returns will need a demat account
• There are 238.71 million internet users in India and only 21.92 million demat accounts
• So, the proposed norms exclude 90% of internet users

However, the number of internet users in India is significantly larger than the number of demat account holders. From the data, this would exclude 90.8 per cent of the potential investor pool from participation in crowd-funding.

The paper noted the importance of balancing the benefits of crowd-funding against the need for investor protection. “While some regulators are criticised by media from ‘taking the crowd out of crowd-funding’, there are also media reports explaining the risks in the model and stating that regulators who are today denounced for their intervention will then be castigated for their neglect,” it said.

Those watching the crowd-funding space endorse this view. Sameer Gupta, partner at EY, said the regulator’s move was an attempt to bring crowd-funding in line with the existing legal framework. Current regulations require companies to issue share certificates in physical or dematerialised form as evidence of their shareholding in the company.

“Unless these provisions are amended to provide for an alternate form of evidencing shareholding, on the balance, and given the manner in which crowd-funding is organised, it seems more efficient for accredited investors to be holders of demat accounts,” he said.

The fact that crowd funding is a niche exercise means the need for a demat account might not be as exclusionary as may appear at first glance, suggested Gupta. "It is questionable whether the entire population in India with access to the internet would be attracted to this form of investing. The more sophisticated investors should in any event not find this an onerous requirement,” he said.

Anshulika Dubey, chief operating officer at Wishberry.in, a reward-based crowd-funding platform, also said the new regulations were a welcome move. “Anywhere that securities are exchanged, there should be regulations around it…even in more developed markets, there is an emphasis on only allowing accredited investors with a certain net worth to make use of this. Regulations elsewhere in the world took some time...the speed with which Sebi has recognised (the need for regulating India’s nascent crowd-funding space) is laudable,” she said. Sebi has invited feedback on the consultation paper till July 16.