In order to facilitate capital raising by small and medium enterprises including start-up companies which are in their early stages of growth and to provide for easier exit options for informed investors like angel investors, VCFs and PEs etc., from such companies, SEBI has decided to permit listing without an Initial Public Offer and trading of specified securities of small and medium enterprises (SMEs) including start-up companies on Institutional Trading Platform (ITP) in SME Exchanges. This gives SMEs and start-ups wider visibility and will allow them to raise capital through trading of specified securities without having to go through the lengthy and complex IPO process. Moreover, the ITP will give angel investors, venture capital firms and other investors to invest their money in a more secured and transparent manner and granting them easier entry and exit mechanism for such investment. While such companies are not permitted to raise equity capital through public issue, they can continue to make private placement.

The legal framework for such listing and trading of the specified securities on the ITP was laid down vide SEBI (Listing of Specified Securities on Institutional Trading Platform) Regulations, 2013(ITP Regulations). With the phenomenal rise of the Start-up ecosystem in India, along with the increase in investments by VCs and private equity funds, SEBI has recently come out with the final set of rules and regulations for ITP-Institutional Trading platform by SEBI (Issue of Capital and Disclosure Requirements) Regulations 2009 (ICDR Regulations) by inserting a “Chapter XC” on “Listing and Issue of Capital by Small and Medium Enterprises on Institutional Trading Platform without initial public offering”. Further, vide said ITP Regulations, consequential amendments have also been made to SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 and SEBI (Delisting of Equity Shares) Regulations, 2009.

Just a day before the Independence Day, SEBI came up with the SEBI (Issue of capital and disclosure requirement) (Fourth Amendment) Regulation, 2015 to facilitate listing of start-ups on ITP in India and to encourage start-ups to raise fund domestically rather than going abroad.

According to NASSCOM estimates in 2014, India has more than 3000 startups and is the third largest base in the world. Most of the tech startups in the country were taking the private equity route for funding or were going outside India to list. Standard example of the same is homegrown Makemytrip which was listed in Nasdaq few years ago. Now that SEBI has opened up ITPs, more start –ups may list in India and may also get to ride e-commerce boom. Understanding the necessity of this platform our Prime Minister, Mr. Narendra Modi, in the 69th Independence day’s speech has announced a new campaign ‘Start-up India, Stand-up India’ with a motive to make India number one in Start-ups.

Definition of Institutional trading platform (ITP)

Regulation 106X of Chapter XC of SEBI (ICDR) Regulations, 2015 defines Institutional trading platform as the trading platform for listing and trading of [1]specified securities of entities that comply with the eligibility criteria specified in regulation 106Y.

Who can avail this trading platform?

Earlier only Small and medium enterprises that satisfied a long list of regulatory and financial criteria as given in Regulation 106Y of Chapter XC of SEBI (ICDR) Regulations, 2009 were eligible for listing of their specified securities on ITP. But now that long list criteria has been dispensed of and only the below mentioned entities are eligible for listing their specified securities on ITP:-

1 (i) Entities which is thorough in the use of technology, information technology, intellectual property, data analytics, bio-technology or nano-technology to provide products, services or business platforms with substantial value addition and at least twenty five per cent of its pre-issue capital is held by qualified institutional buyer(s) as on the date of filing of draft information document or draft offer document with the Board, as the case may be; or

(ii) any other entity in which at least fifty per cent of the pre-issue capital is held by qualified institutional buyers as on the date of filing of draft information document or draft offer document with the Board, as the case may be.

2. No person, individually or collectively with persons acting in concert, shall hold 25% or more of the post-issue share capital in an entity specified in sub-regulation (1).

Why is it important?

Start-ups in India including Snapdeal, Flipkart, Paytm etc. have been knocking in the door of private equity investors and diligently avoiding public market. Further, India’s public market hasn’t grown much in recent years compare to China and others. If this practice will continue, India will lose the race with other global market with market capitalization of listing universe.

Also if start-ups are encouraged to list locally, the listed universe can expand and this would draw in foreign currencies which would have been otherwise lost in other countries. The platform connects growing businesses to a pool of sophisticated investors while offering a wide variety of exciting investment opportunities to the investors

What will be the benefit of listing in ITP?

Through ITP, SEBI has opened a platform for the startups to list without much red tape. Many of the stringent rules governing IPOs has been relaxed by SEBI to encourage the companies to list their security in this platform. Like, on ITP promoters capital will be locked in only for six months against the three year lock in for normal IPOs. Also there is no need to make elaborate disclosure on how IPO fund will be used.

The company that lists on the ITP will be given an option to migrate to the main board after three years. However, having relaxed many rules that protect investor interests in IPOs, SEBI has made sure that only institutional investors and HNIs invest in the new ITP.

Procedure for listing of specified securities on ITP

Listing without public issue

One of the advantages of ITP is that an entity desirous to get listed in this platform has an option but not an obligation to make public issue. Even if the company chooses to make public issue, host of regulations that would apply to a regular public issue would not apply. In order to get the specified securities listed on ITP platform without making any public issue the following is required to be complied with by the entity:

a) The entity shall file a draft information memorandum along with necessary documents with Board along with fee as specified.

b) The draft information memorandum shall contain the disclosures as specified for draft offer document.

c) The entity shall obtain in principle approval of the Recognized Stock Exchange (RSE) in which it proposes to get its specified securities listed,

d) The entity shall list its specified securities on the RSE within thirty days:

(a) from the date of issuance of observations by the Board; or

(b) from the expiry of the period stipulated in sub-regulation (2) of regulation 6, if the Board has not issued any such observations.

e) The draft and final information documents shall be approved by the Board of directors of the entity and shall be signed by all directors, CEO i.e., the Managing Director or Manager within the meaning of the Companies Act, 2013 and CFO.

f) The signatories shall also certify that all disclosures made in the information documents are true and correct.

Moreover such entities can avail the benefit of easier exit subject to the following conditions:-

  1. If the shareholders approves such exit by passing special resolution vis postal ballot; and
  2. Recognised stock exchange approves such exit.

Listing pursuant to public issue

For listing of securities in ITP pursuant to public issue the following is required to complied with by an entity:-

a) File a draft offer document along with necessary documents with the Board with fees as specified.

b) The minimum application size shall be 10 lakh rupees.

c) The number of allottees shall be more than 200.

d) The allocation in the net offer to public category shall be as follows:

i. 75 % to institutional investors:

Provided that there shall be no separate allocation for Anchor Investors;

ii. 25 % to non-institutional investors;

e) Any under-subscription in the non-institutional investor category shall be available for subscription under the institutional investors’ category.

f)  The allotment to institutional investors may be on a discretionary basis whereas the allotment to non-institutional investors shall be on a proportionate basis.

g) The mode of allotment to institutional investors, i.e., whether discretionary or proportionate, shall be disclosed prior to or at the time of filing of the Red Herring Prospectus.

h) In case of discretionary allotment to institutional investors, no institutional investor shall be allotted more than 10% of the issue size.

i) The offer document shall disclose the broad objects of the issue.

j) The basis of issue price may include disclosures, except projections, as deemed fit by the issuers in order to enable investors to take informed decisions and the disclosures shall suitably caution the investors about basis of valuation.

SEBI has also reduces the burden of start-ups by providing them exemptions from delisting norms and take over code. Thus it has become easier to the start-ups to survive.

From the above discussion we can conclude that ITP is a convincing platform for the start ups to list and to show their performance to their investors without IPO. Since it provides several benefits like easier entry and exit option, better visibility and wider investor base, relaxed compliance with various provisions, tax benefit to the long term investors, one may say tht its an smart move of SEBI for attracting SMEs and start-up towards the domestic market.

[1] As per regulation 2(1)(zj) of SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009, “specified securities” means equity shares and convertible securities.

(Authored by Ms Barsha Dikshit and Ms. Jyoti Shrivastava who working as Executive and ACS with Vinod Kothari & Company  and can be reached atbarsha@vinodkothari.com)

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