Securities and Exchange Board of India (SEBI) in its board meeting held on June 23, 2015 has notified norms for companies intending to list on an alternate listing platform (Start-up Listing Notification). This was earlier proposed by SEBI in its discussion paper dated March 30, 2015 (Start-up Listing Proposal).In the Start-up Listing Notification, SEBI clarified that this alternative listing platform is the institutional trading platform (ITP). The ITP is an existing platform but has been mostly defunct.
The Start-Up Listing Notification reflects most of what was set out in the Start-up Listing Proposal. We had analysed the proposal earlier in our article ‘SEBI’s proposal of speedy listing options offers limited benefits to start-ups’ dated May 4, 2015.
The major deviations in the Start-up Listing Notification from the Start-up Listing Proposal are set out below:
Eligibility- dilution of pure IT space: The Start-up Listing Notification restricts this route to companies, which are “intensive in their use of technology, information technology, intellectual property, data analytics, bio-technology, nano-technology to provide products, services or business platforms with substantial value addition”. The Start-up Listing Proposal was slightly different, enabling new-age companies having an “innovative business model and belonging to knowledge-based technology sector.” None of the terms is defined but broadly this is a shift away restricting the route to pure “technology space” companies which the proposal had focussed on.
Eligibility - requirement of minimum QIB (i.e. sophisticated shareholder) shareholding-pre-listing: For a company to be eligible to list under the Start-up Listing Notification, at least 25 per cent of its pre-issue capital must be held by qualified institutional buyers (QIBs). This is a requirement for technology- based companies. Non-technology companies must have a higher percentage of QIB shareholding – i.e, at least 50 per cent of the pre-issue capital held by QIBs. QIBs are entities defined under the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 (ICDR Regs.).
There was no minimum QIB participation requirement in the Start-up Listing Proposal. It only required that an eligible company had to ensure no person (individually or collectively with person acting in concert) owned 25 per cent or more of the pre-listing share capital. This rule is present in the Start-up Listing Notification.
Incidentally, the Start-up Listing Notification broadens the definition of QIBs to include family trusts, systematically important NBFCs registered with RBI and the intermediaries registered with SEBI, “all with net-worth of more than Rs 500 crore.” The proposal had envisaged a broader range of QIBs.
QIBs are conceptually the ‘big boy’ investors. A higher participation of QIBs, the ‘sophisticated investors’, is commonly considered a safe haven for retail investors.
Post-listing shareholding requirement: The Start-up Listing Notification further mandates that no person (individually or collectively with persons acting in concert) in such a company shall hold 25 per cent or more of the post-issue share capital.There was no such requirement in the proposal.
Disclosures, restricted to broad objects: The Start-up Listing Notification states that there shall be no ceiling on funds raised for general corporate purposes. The Start-up Listing Proposal was silent on the maximum amount eligible to be raised under the general corporate purposes category but allowed it to be a ‘main object’.
Offer documents relating to listing are required to disclose approximate usages of the listing proceeds. General corporate purpose as an end-use of listing funds is sensitive to capital markets regulators because is this is inherently vague and intangible (for example, branding) and hence prone to leakages or fiscal indiscipline by significant shareholders in the company once the listing funds are raised.
Increase in discretionary allotment: Discretionary allotment to QIBs has been increased from 5 per cent to 10 per cent of the issue. There is now a lock-in of 30 days for discretionary allotment similar to the anchor investment lock-in for regular IPOs.
Undersubscription: The Start-up Listing Proposalprovided that in case of an undersubscription in the NII category, the rest would be available to the QIB category.The notified norms however are silent on this respect. Just as background, QIBs and NIIs (non-instituional investors) are elibible to invest in this new listing route in the ratio of 75 per cent and 25 per cent, respectively. NIIs are entities which are neither QIBs nor retail investors.
Increase in minimum trading lot: The minimum trading lot has been increased from Rs 5 lakh to Rs 10 lakh. Therefore the ‘ticket-size’ of each unit for eligible investors has been doubled.
Relaxation in minimum allottees: The minimum number of allottees has been reduced from 500 to 200.
Migration: The Start-up Listing Proposalrequired that the company listed on this platform would have a right (but not obligation) to migrate to the main board after one year from the listing. The Start-up Listing Notification increases this timeline to a mandatory listing of3 years. In other words, if a company lists on this new route, it cannot move to regular listing on the exchange for atleast three years.
With the norms now effective, it remains to be seen whether this new route will have an aspiration quality similar to main board listings. The route remains available to a limited set of start-ups given stringent minimum shareholding norms, in particular (i) a minimum of 25 per cent /50 per cent (technology vs. non-technology companies) shareholding pre-listing required to be held by ‘big-boy’ investors i.e. QIBs and (ii) the prohibition of any single person (directly or indirectly) holding 25 per cent or more shareholding post-listing.
A lot of the success of this route will depend on a few listings—if these happen to be high-quality issuances with sustained benefits for stakeholders well after listing, then the new route will be a game-changer.
(Srishti Ojha is Partner & Mugdha Sharma is an Associate at Verist Law.)