[By Shubham Kumar Singh]
The author is a student at Amity Law School Delhi.
INTRODUCTION
India boasts the third largest startup ecosystem in the world, with more than 50,000 startups, out of which more than 9,000 are technology-led startups. (i) India is also a host to more than 800 venture funds and 2,751 angel investors. (ii) In this thriving startup ecosystem, many unicorns like Flipkart, Zomato, Paytm, and its likes are planning for public listing in the near future, but their favourite destination, unfortunately, is not India but outside India. (iii) Given this thriving startup ecosystem, the Securities and Exchange Board of India (SEBI) decided to relax the terms of listing and to provide a different platform for these startups called Innovators Growth Platform (IGP). Experts of the industry have called it a step in making Nasdaq of India. They see a huge potential in IGP as it was there in NASDAQ back in the 1970s.
WHAT IS NASDAQ?
National Association of Securities Dealer Automated Quotation (Nasdaq) is a US-based global platform to trade securities in a completely computerized manner. In 1971, the National Association of Securities Dealers (NASD) was created to allow investors to buy and sell securities electronically. It was the first of its kind platform in the world for electronically trading securities. It provides a cutting-edge platform for high-tech and startup companies. Therefore almost all big tech giants like Facebook, Google, Apple, Amazon chose Nasdaq in their initial years. Nasdaq exchange boasts 3,800 companies that hold $11 trillion market capitalization, making it a large portion of the global equity market. (iv)
INNOVATORS GROWTH PLATFORM (IGP)
In the view of the emerging startup ecosystem in India, in 2015, SEBI established a new segment for listing companies besides the main board listing procedure named Institutional Trading platform (ITP). It was to attract startups listing, but it could not generate any result. Therefore in 2018, SEBI reviewed and modified the ITP and launched the modified version with a new name, Innovators Growth Platform (IGP). SEBI amended the SEBI (Issue of Capital and Disclosure Requirements) Regulation, 2018 to change the framework of ITP. Even after the modification, IGP failed to garner much interest among the startup community, and still, there are no companies listed on it. (v)
SEBI EASES RULES TO ATTRACT STARTUPS LISTING
Even after a complete revamp of ITP and the launch of IGP, startups were rather flying abroad to more attractive destinations like Nasdaq instead of IGP. To make IGP more attractive and competent to listing platforms like Nasdaq, SEBI decided to ease its various rules of listing. On 25th March 2021, SEBI, via its press release (PR no. 15/2021), disclosed the changed rules in the listing policy of the IGP.(vi)
SEBI, to make the IGP platform more accessible to the startups, made the following changes to the listing norms via an amendment to the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018:
1) Listing Eligibility Reduced to One Year
In the mainboard listing procedure, the Company that wanted to be listed needed to show a three-year record of operations, profits, assets, net worth, etc. Whereas under the IGP, the Eligible Investors of the Company were only required to hold 25% of the pre-issue paid-up capital for two years.
Now it has been reduced to only one year. This will make a listing in India more lucrative than it was before.
2) Open Offer Requirement Increased to 25%
Under the takeover code (The Substantial Acquisition of Shares and Takeover Regulations, 2011), no acquirer can acquire 25% or more shares/voting rights in a listed company without making a public announcement of an open offer. This requirement is to give an option to the existing shareholders to either exit their investment planning. Therefore SEBI has increased this cap to 49% for companies to be listed on IGP. This will give extra room for Startups to raise capital without the burden of an open offer as it is a costly and time-taking affair.
Merger and Acquisition is one of the significant concerns of startups in India. Stringent post listing norms force these startups to shift their operation outside India. This amendment would simplify mergers and acquisitions for startups giving them enough flexibility to raise capital post listing.
3) Relaxed Mandatory Disclosures
In the case of mainboard listed companies, whenever an acquirer acquires five per cent or more of the shares/voting rights in a target company it has to make some mandatory disclosures as per the takeover code. Furthermore, mandatory disclosure requirements have to be observed whenever there is a change of positive two per cent or a negative two per cent. (vii)These caps are not suitable for startups because their issue size is not that large as that of mainboard companies. Promoters of startups require more flexibility in these disclosure requirements as it is a costly and time taking affair.
For the startup companies to be listed on IGP, the new norm has increased the threshold from five per cent to ten per cent and thereafter, fluctuations of 5% are the new threshold rather than the earlier 2 %.
4) Delisting Procedure Eased
- a) Approval
On the mainboard, a company wishing to delist is required to have a two-thirds majority of the shareholders, but for the startups listed on IGP, the approval needed for delisting must be approved by only a majority of minority shareholders.
- b) Acquisition Cap
On the mainboard, a company considering delisting needs to acquire 90% of the shareholding or voting rights in the company. A startup listed on the IGP only needs to acquire 75% of the total shareholdings or voting rights before considering delisting.
- c) Price
A company wishing to delist from the mainboard needs to calculate the price of the shares through the reverse book building process. Whereas for a company listed on the IGP, the acquirer can quote a price with due justification.
5) Migration Requirements Down to 50%
Earlier for a company listed on IGP wishing to migrate to the main board was required to have 75% of its capital held by Qualified Institutional Buyers (QIBs) as of the date of making such application. The requirement has been brought down to 50% only.
6) Provision for Differential Voting Rights (DVR) Allowed
Companies listed on the mainboard already had a right to issue shares with differential voting rights (DVR) or Superior voting rights, but now SEBI has allowed for companies to be listed on IGP to also issue shares with DVR or Superior voting rights for promoters.
7) Anchor Investors
On the mainboard listing, the company has the discretion to transfer to any Anchor Investor 60% of the Qualified Investment Buyer’s portion of the issued shares before the issue opening subject to such shares being locked for 30 days from the allotment date.
Whereas on IGP, the company has complete discretion to transfer to any investor 60% of any institutional or non-institutional buyer’s portion of the issued shares before the issue opening subject to such shares being locked for 30 days from the allotment date.
8) Investor’s Rights to continue
On the mainboard, the special rights enjoyed by investors do not exist post listing, but on IGP, an investor holding more than 10% of capital before the listing can continue to have special rights like affirmative right or board rights even post a listing.
9) Lock-In Period Reduced to One Year
On the mainboard listing, post issue lock-in requirement for category II Alternative Investment Funds (AIFs) are not applicable beyond one year but, on IGP, it was required to be locked in for two years from the date of purchase. Now that period has been reduced to one year for IGP listing as well.
10) Accredited Investors
There is no Accredited Investor concept on the mainboard listing, but the same has been created for IGP. Earlier, an Accredited Investor was eligible based on their 10% pre-issue shareholding. Now that hurdle has been removed, their entire pre-issue shareholding will be considered while determining their eligibility.
CONCLUSION
India is working to become a $ 5 Trillion economy by 2024, startups and entrepreneurship become indispensable. (viii) Startups are growth-oriented businesses that need capital to fuel that growth. Public listing is the equity infused capital raising technique best suited for such growth-oriented startups, which will ultimately help them to turn into giant corporations. The listing of these prospective giant corporations has a huge impact on public wealth creation through Initial Public Offerings. India would only retain the wealth of the unicorn startups it has if the amended rules of listing are aptly implemented.
Nasdaq was able to tap the wealth of high-tech startups in the 1970s because of its flexible and easier listing policies. This led to tremendous growth in technology-based startups in the USA and made Nasdaq one of the world’s largest stock exchanges in terms of market capitalization. The IGP has the same potential today. All it needs is to implement a governance mechanism that is adaptable and accessible to Startups.
ENDNOTES
(i) https://www.startupindia.gov.in/content/sih/en/international/go-to-market-guide/indian-startup-ecosystem.html#.
(ii) https://inc42.com/buzz/here-are-the-top-10-active-venture-capital-firms-in-india/#.
(iii) https://www.financialexpress.com/market/ipo-news/flipkart-paytm-zomato-initial-public-offering-stock-may-see-listing-of-internet-giants-soon/2100786/.
(iv) https://www.businessinsider.com/heres-the-difference-between-the-nasdaq-and-nyse-2017-7?IR=T.
(v) The Economic Times, 26th March 2021, pg-14.
(vi) https://www.sebi.gov.in/media/press-releases/mar-2021/sebi-board-meeting_49648.html.
(vii) The Substantial Acquisition of Shares and Takeover Regulations, 1997 reg 3 (1).
(viii) https://pib.gov.in/PressReleseDetailm.aspx?PRID=1597299.
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