Institutional Trading Platform: Beneficial to Small & Medium Enterprises

Pawan Maloo

SEBI (Listing of Specified Securities on Institutional Trading Platform) Regulations 2013  came into force on 08.10.2013. Slowly and gradually companies and the small & medium enterprises are becoming aware with the provisions of these regulations and had started availing its benefits. But still the pace is pretty slow. In the beginning itself some enterprises tried to take tax benefits arising out Institutional Trading Platform (ITP) listing and their objective was confined to the tax benefit on sale of Equity shares on stock exchange by virtue of section 10(38) of Income Tax Act, 1961. To enable the ITP to reach its actual goals some amendments are introduced in eligibility criteria for listing on ITP and trading of shares of such listed enterprise. Let’s have a brief look at the provisions and goals of the SEBI Regulations 2013 regarding ITP.

SEBI (Listing of Specified Securities on Institutional Trading Platform) Regulations 2013 are applicable to small & medium enterprises which do not have their securities listed on any recognised stock exchange and which seek listing of their specified securities exclusively on the institutional trading platform. ITP is a trading platform in a SME exchange for listing and trading of specified securities for informed investors.

Listing eligibility criteria and procedure:

The basic eligibility criteria lay down certain conditions to be fulfilled for listing on ITP.

1. A clear CIBIL history is mandatory for the Company as well as its directors;
2. No winding up petition against the company should have been admitted by a competent court;
3. Such enterprise should not be a sick company as defined in BIFR regulations and
4. It should not have applied to BIFR in last 5 years prior to date of application for listing on ITP.
5. Company should be a clean company where no regulatory action has been taken against the company, its promoter or director, by SEBI, RBI, IRDA or MCA within last 5 years prior to the date of application for listing.
6. The listing desiring company should not have completed 10 years of its incorporation.
7. On revenue front it is prescribed that the annual revenue should not exceed 100 Crore rupees in any of the previous financial year and
8. The total paid up capital should not be more than 25 Crore rupees in any of the previous financial years.

These are some conditions which should be met for eligible for ITP.

In addition to the above one of the following conditions should also be met mandatorily:

1. One alternative investment fund, venture capital fund or other category of investors/ lenders approved by the Board has invested a minimum amount of fifty lakh rupees in equity shares of the company, or
2. At least one angel investor who is a member of an association/group of angel investors which fulfils the criteria laid down by the recognised stock exchange, has invested a minimum amount of fifty lakh rupees in the equity shares of the company through such association/group, or
3. The company has received finance from a scheduled bank for its project financing or working capital requirements and a period of three years has elapsed from the date of such financing and the funds so received have been fully utilized, or
4. A registered merchant banker has exercised due diligence and has invested not less than fifty lakh rupees in equity shares of the company which shall be locked in for a period of three years from the date of listing, or
5. A qualified institutional buyer has invested not less than fifty lakh rupees in the equity shares of the company which shall be locked in for a period of three years from the date of listing, or
6. A specialized international multilateral agency or domestic agency or a public financial institution as defined under Companies Act has invested in the equity capital of the company.
   

Additional eligibility criteria laid down by BSE.

A) The minimum amount of above investment shall be  10 crores or 25% of the listed capital of the ITP Company, whichever is higher. Further, the same should be locked in for a period of three years from the date of listing.

Bifurcation of Rs, 10 crores shall be as follows:

1. Minimum investment of Rs. 50 lakhs by entities in equity shares of the company as prescribed by SEBI with a lock- in for a period of three years for all entities.

2. Balance amount of investment as per above limits (i.e. rupees ten crores or more, as the case may be) by any other SEBI approved categories of investors like qualified institutional buyers, etc. with a lock-in period of 3 years from the date of  listing.

B) There should not be any change in the promoters of the company in preceding one year from date of filing the application to BSE for listing under SME segment.

C) The company shall satisfy at least one of the following criteria as on the date of application:

i) Net tangible assets of minimum Rs. 1 crore (net fixed assets plus net current assets)

                                               OR

Net income * (excluding extraordinary and other income) of Rs.50 lacs as per the latest audited financials

*(Net income = sales – purchases)

ii) There should not be any change in the promoters of the company in preceding one year from date of filing the application to BSE for listing under ITP segment.

iii) Companies have to compulsory sign agreement with both the depositories.

iv) In cases where merchant banker has made the investment in the company the MB would need to submit a Due Diligence Certificate in the format (Form A & H) as is prevailing in SME regulations.

The above is mandated by BSE only.

Additional eligibility criteria laid down by NSE

In case the company qualifies for listing on ITP because it has received working capital or project loan from a scheduled bank (point iii of the above list of criteria), a reference from the said bank will be obtained in the specified format to ascertain the track record of the company and timely servicing of the loan.

The above is mandated by NSE only.

Disclosures:

The following matters should be disclosed in the offer document:

1. Defaults in respect of payment of interest and/or principal to the debenture/bond/fixed deposit holders, banks, FIs by the applicant, promoters/promoting company(ies), group companies, companies promoted by the promoters/promoting company(ies) during the past three years. An auditor’s certificate shall also be provided by the issuer to the exchange, in this regard.
2. The applicant, promoters/promoting company(ies), group companies, companies promoted by the promoters/promoting company(ies) litigation record, the nature of litigation, and status of litigation.
3. In respect of the track record of the directors, the status of criminal cases filed or nature of the investigation being undertaken with regard to alleged commission of any offence by any of its directors and its effect on the business of the company, where all or any of the directors of issuer have or has been charge-sheeted with serious crimes like murder, rape, forgery, economic offences etc.
   

The eligible company may apply to a recognised stock exchange for listing of its specified securities on the ITP, along with an information document containing the specified disclosures. It has been mandated to host information document on the website of the recognized stock exchange and made public at least twenty one days from the date of such filing. On application the recognised stock exchange may grant in-principle approval to the company. On satisfaction that all the essential eligibility conditions are satisfied the recognised stock exchange may list the securities of the company on the institutional trading platform.

Restrictions:

Listing shall not be accompanied by any issue of securities to the public in any manner. The Company is not permitted to make any Initial Public Offering while securities are listed on ITP. Further capital raising is permitted through rights issue or private placement. At least 20% of the Promoters capital shall be locked in for a period of 3 years from the date of listing. The minimum trading lot on institutional trading platform shall be ten lakh rupees. All specified securities of the company shall be in dematerialized form upon listing on institutional trading platform. The Company should have Connectivity with at least one depository at all times.

Exit from Institutional Trading Platform:

Voluntary Exit: A Company may voluntarily exit from ITP by complying with following-

1. Its shareholders approve such exit by passing a special resolution through postal ballot where 90% of total votes and the majority of non-promoter votes have been cast in favour of such proposal.
2. The relevant stock exchange approve such exit

Compulsory Exit: Company have to exit from ITP platform compulsorily if,

1. The securities have been listed on this ITP platform for a period of ten years.
2. The company has paid up capital of more than twenty five crore rupees.
3. The company has revenue of more than three hundred crore rupees as per the last audited financial statement.
4. The company has market capitalization of more than five hundred crore rupees.

Other Criteria for Compulsory Exit: Post Listing Failure in comply with the Regulatory requirement may force for compulsory exit. A company listed on ITP shall be delisted and permanently removed from the institutional trading platform under the following circumstances:

a) the company has failed to file its periodic filings with the recognised stock exchange for more than one year; or

b) the company has failed to comply with corporate governance norm(s) for more than one year; or

c) The recognised stock exchange may delist the company on non-compliance of the condition of listing as may be specified by the recognised stock exchange.

In case of a company delisted under above criteria, no company promoted by promoters and directors of such delisted company shall be permitted to be listed on institutional trading platform for a period of five years from the date of such delisting.

Benefits of being listed on ITP:

These benefits are somewhat similar to the benefit of listing on main platform of any stock exchange.

1. Listing facilitates capital raising. Private equity players and institutions have transparent access to company’s functions and performance which facilitate fund raising through private placement, preferential allotment or rights issue of shares.
2. ITP regulations provide easier entry and exit options for informed investors like angel investors, VCFs and PEs etc.
3. Encouragement in innovation and entrepreneurial spirits and professional trade and corporate practices.
4. On ITP, compliances are relaxed to some extent and listing is cost effective.
5. Equity financing reduces the Debt burden and increase the viability by lower financing cost and healthier financials. It also enhances company’s visibility.                   

Tax Benefits:

Shareholder are eligible to claim exemption granted u/s 10(38) in case of long term capital gain whereas, short term capital gain is taxed at 15% due to levy of Securities Transaction Tax which is 0.1% at present. Buyback of shares of an unlisted company attract implications of section 115QA r.w. section 10(34A). Whereas, the listed companies are not affected by the provision of section 115QA.

Takeaway:

The listing on ITP platform is easy, cost effective, tax beneficial, funding is facilitated and companies can reduce their debt burden by attracting private equity players. Even a private limited company can get itself converted into a limited company and proceed for the listing.

(Author can be reached at 07738770841 /Pawan.maloo25@gmail.com)

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