Sebi may make it easier to start up on bourses

Mumbai: The Securities and Exchange Board of India (Sebi) is *planning to relax rules* for listing of startups in India, which include giving promoters the flexibility to categorise themselves as ordinary shareholders and exempting them from the mandatory three-year lock-in period. The capital markets regulator may *also free them from fiduciary responsibilities* of a promoter, two people with direct knowledge of the matter said. These measures, if implemented, are expected to *benefit the global private equity-backed startups* such as Ola, Flipkart and Paytm, inducing them to consider the possibility of listing in the country. The proposals were discussed by the Sebi appointed committee on startup listing and will be a *part of the final recommendation report* scheduled to be submitted the next month. As per the current rules, all shares of pre-IPO investors in a company are locked in for one year post listing. Further, 20 per cent of the shares held by the promoter group have a three-year lock-in period. This special condition limits the flexibility of private equity firms to get a timely exit. The regulator now plans to reduce this period to six months for all pre-IPO shareholders. Relaxing the promoter reclassification norms would be a move in the right direction as it would provide more flexibility to startups planning to list. These companies operate with completely different business models and hence need more lenient regulations, said Sandeep Parekh, founder, Finsec Law Advisors.

In order to mitigate risk of lenient regulations, the regulator could keep trading in these companies confined to wealthy investors and institutions, he added. Most PEs are wary about being categorised as promoters of a company since it attracts lot of fiduciary responsibilities and disclosure requirements. They also come under the ambit of Sebi’s insider trading rules. Hence, investment decisions they undertake could lead to conflict of interest. For instance, some global PE funds have invested in competing companies. If one company lists, an action taken by the PE in a competing company (including sale or purchase of shares) could be construed as a conflict of interest situation attracting regulatory action. Although *current rules permit promoters to declassify* themselves as ordinary shareholders, the requirements for such a procedure are considered onerous. For instance, a promoter seeking to declassify as shareholder should hold less than 5 per cent stake without any special rights. Hence if a PE investor is holding say 25 per cent, in order to declassify himself, he has to offload 20 per cent of his stake in the company. To address this challenge, Sebi may allow PEs, which own significant stake in a startup but don’t want to be a part of the promoter group, to declassify themselves prior to listing. A relaxed requirement on minimum promoter holding would certainly help the startups planning to list, as the promoter holding in many of these companies comes down significantly on account of series of fresh capital raising, said Salil Pitale, managing director, Axis Capital. Such flexible declassification will, however, come with a caveat. The private equity firms which want to use the provision will have to give up all their special and affirmative rights in the company. These special rights usually involve power to veto any significant capital expenditure plan and say in key appointments of the company. The market regulator had *come up with a special window for startups* called Institutional Trading Platform (ITP) in 2015. The platform failed to take off due to liquidity concerns and other regulatory challenges. The current committee is seen as Sebi’s second attempt to attract startups for listing.





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