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The Securities and Exchange Board of India’s June 17 consultation paper on crowdfunding regulations may have the effect of excluding much of India’s potential investors in this nascent avenue for raising capital.
The paper sought to put in place a framework for crowdfunding, a process of raising capital using web-based portals including social media, now catching on in India.
Draft regulations envisage a framework where all such transactions would take place through a demat account, which is currently used primarily to hold share certificates in electronic form.
There are currently little over 21.92 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.
Such a requirement would exclude a large number of investors who don’t have such an account. The number of internet users in India is significantly larger than the number of demat account holders. In fact, the Telecom Regulatory Authority of India put it at 238.71 million, based on December-end data.
In effect, this would exclude 90.81% of the potential investor pool from participation in crowdfunding.
The paper noted the importance of balancing the benefits of crowdfunding against the need for investor protection.
“While some regulators are criticised by media from ‘taking the crowd out of crowdfunding', 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.
The regulator has invited feedback on the consultation paper till July 16.
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