Start-ups seek easier institutional ownership for IPO regulations

Currently, a company needs 50% institutional ownership to launch an IPO

START-UPS want markets regulator Sebi to ease minimum institutional ownership criteria to qualify for launching an initial public offering (IPO). Currently, regulations mandate a company to havea 50% institutional ownership in order to launch an IPO. However, many small start-ups are funded by angel investors who don’t qualify as institutional investors as per the Securities and Exchange Board of India (Sebi).

Angel investors or seed investors are individual investors who fund start-ups usually in exchange for convertible debt or equity.As per sources, start ups have already conveyed this to Sebi chairman UK Sinhaduring a recent interaction.

As per Sebi regulations for listing of start-ups, 50% of the pre-issue capital of the company must be held by qualified institutional buyers (QIBs) to qualify for fund raising via IPO. However, for the e-commerce and technology start-ups 25% of the pre-issue capital should be with the institutional investors.

“Private equity players don’t invest much in the smaller start ups. Even the banks don’t lend them. Hence they have to depend on funding from high networth individuals. Hence, many of the startups don’t meet the institutional ownership criteria,” said an investment banker privy to the development.

The Primary Markets Advisory Committe (PMAC) of Sebi had met on May 30 to discuss changes that need to be brought in pertaining to fund raising of start-ups. As per sources, proposals that were discussed by the PMAC included decreasing the minimum lot size to `2.5 lakh from `10 lakh and reducing the minimum ticket size for participation in start-up IPOs to `5 lakh from `10 lakh currently and reducing the timeline for migrating from the start-up platform to the mainboard from three years to two years.

In August 2015, the regulator had announced a new set of listing regulations for start-ups operating in the e-commerce space in sectors such as information technology (IT), data analytics and biotechnology. The regulations provided several relaxations to startups keeping in mind the unique nature of the industry including removal of caps on the money spent by start ups on publicity and advertisements as they need to spend much more for such purposes.

According to the Sebi Capital Raising and Listing on Institutional Trading Platform regulations, start-ups would be listed on a special institutional trading platform (ITP) and only institutional investors and high net worth individuals (HNIs) will be able to trade on it. The retail investors were not allowed to invest in such issues as the markets regulator felt small retail investors need to be safeguarded against a higher level of risks associated with the platform.

In 10 months of its existence, the ITP platform has not seen a single listing by a start-up. Infibeam, an e-commerce company that went for an IPO during the current calendar year, chose to list on main board instead of the ITP. Although the company filed its draft prospectus with the regulator before ITP was announced, the company had a choice subsequentl yto migrate.

As per Sebi regulations, 50% of the pre-issue capital of a company must be held by qualified institutional buyers to qualify for fund-raising via IPO. However, for the e-commerce and technology start-ups, 25% of the pre-issue capital should be with institutional investors