In a paper dated March 30, 2015, SEBI has proposed amendments (‘Proposal’) which, if notified, will provide an easy route for accessing public markets to a limited set of start-ups (‘Special Listing Route’). The Special Listing Route will, along with other advantages, be quicker than the existing IPO process which involves an onerous due diligence and related drafting which is often fairly time-consuming and hence costly to issuers. The Proposal was open for comments till April 20, 2015 and is expected to be notified in the same form or with some modifications. On a close reading of the Proposal, it is apparent that (i) the benefit of the Special Listing Route is focused on a highly limited range of new companies; and (ii) the benefits of the Special Listing Route compared to the standard IPO (which is in any event available to all such companies) are fairly limited—particularly, there is no access to retail investors in this route.
The existing regular IPO route as well as the abbreviated SME IPO route remain open to all eligible companies (including start-ups). Another existing platform for start-ups is the institutional listing platform (‘ITP’), which has been introduced for listing private placements by young SMEs (small and medium enterprises) by SEBI in 2013. So far the ITP has not been a popular platform for SME listings due to several commercial reasons notably because it allows for listing of only private placements and rights (without renunciations) and not IPOs. The SME IPO route, while quicker in process than the main board IPO route and with some other benefits, does not exempt issuers from the stringent public float norm applicable to main board IPO issuers. For commercial reasons apart from this, the SME IPO route, as well as the ITP route, has not seen many listings.
The Proposal creates an instrument, which is in effect a cross between a SME IPO and an ITP listing. A significant feature of the Proposal is that it requires the Special Listing Route to have at least 500 investors (including non-institutional investors or NIIs). NIIs are investors who are not retail investors and not qualified institutions investors. A threshold of 500 investors (which can include NIIs), as the law stands at the moment, will trigger prospectus registration requirements—i.e., a listing with 500 investors will be viewed as an IPO. This is because a listing is viewed as a ‘public issue’ as the Companies Act, 2013 deems any offer to 50 or more (with exceptions notably qualified institutions investors). The Proposal if notified will take such a listing out of the purview of the IPO regime and over to the softer ITP norms. For this, the issuer has to qualify—the qualifications are fairly narrow as set out below.
The Proposal seeks to retain high-quality issuances within India: “if the capital raising process is not made further relaxed for such issuers, they may be driven to list on stock exchanges outside India.” Incidentally, in the spirit of containing regulatory arbitrage, the Proposal also reduces the disclosure norms for regular IPOs.
The key benefits of the Special Listing Route vis-à-vis the existing ITP route are: (i) the mandatory lock-in of at least 20% of the post-IPO capital which earlier was for three years from the date of listing for promoters will not apply; (ii) the threshold for minimum trading lot has been reduced from Rs 10 lakh to Rs 5 lakh; and (iii) the minimum allottees are at 500—in effect, up to 500 qualified institutions buyers and NIIs (i.e., not retail bidders) can invest via the Special Listing Route. This is a major benefit because if a listing is viewed as an IPO as mentioned earlier, there the process has highly elaborate disclosure norms, ongoing obligations and minimum public float norms. The other advantage provided to companies using the Special Listing Route is that SEBI-registered category I and II alternate investment funds with a statutory minimum requirement of unlisted company investment can invest in offering and this will still qualify as an unlisted trade. This is an incentive for alternate investment funds to invest in the Special Listing Route.
Further, the Proposal clarifies that for the Special Listing Route besides specific disclosures required by ICDR for determining basis of issue price (other than projections), the basis of issue price can also be justified by any means deemed fit by the issuers and disclosed in the offer document. It is of special interest that SEBI permits the Special Listing Route to have the main object of the listing as general corporate purposes and allows the objects of the issue to “be restricted to only broad objects.” This is especially relevant as a benefit for Special Route Listing considering that SEBI has, in the very recent past, issued the SEBI (Framework for Rejection of Draft Offer Documents) Order, 2012 in October 2012 which states vague objects or objects where the major portion of the issue proceeds do not create any tangible assets, as a ground for rejecting offer documents.
The Special Listing Route, has certain restrictions which the ITP listings otherwise do not have—in the Special Listing Route: (i) no QIB can be allotted more than 5 per cent of the issue size; and (ii) the listing on the platform is required to remain for at least for one year before migrating (at the option of the issuer by specified process) to the main board. There are no such restrictions in the regular ITP listings.
It is interesting to note that benefits of the Special Listing Route are available to a highly limited range of companies- essentially professionally managed ‘new age companies’ with limited founder stake. The Proposal states that companies where any person (individually or collectively with persons acting in concert) own 25% or more of the pre-issue share capital of a company, will be ineligible for this Special Listing Route. The Proposal terms companies passing this shareholding test as being ‘professionally managed’.
A few start-ups have a shareholding pattern that is as significantly diluted in the early years pre-listing. Further, the special listing route is available essentially to dot.coms—the Proposal limits the Special Listing Route to companies which (i) are “in the area of software product development, e-commerce, new-age companies having innovative business model etc. which create new business opportunities or which serve important efficiency enhancement in existing business activities”. In outcome therefore, the Special Listing route in the Proposal will only available to dot.coms which have significant private investor (venture capital or private equity) investments.
It is unlikely that the Proposal will be notified in exact form because the Proposal was open for public comments. Once notified it remains to be seen whether the Special Listing Route will be popular or remain largely dormant as the ITP currently is.
(Srishti Ojha is Partner & Mugdha Sharma is an Associate at Verist Law.)
