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26 Jun 2015

Fund Raising by Start-ups: SEBI’s simplified framework

By: Rajnish Pal
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At its Board meeting held on June 23, 2015, SEBI approved the necessary changes in the Institutional Trading Platform (ITP) to simplify fund-raising by start-ups/new age companies. This is the logical outcome of the exercise initiated by SEBI on March 30, 2015 when it issued a discussion paper regarding a proposed alternative capital raising platform catering to start-ups/ “new-age” companies and invited comments from the public.

The Institutional Trading Platform for Small and Medium Enterprises (“SMEs”) has been in place since October 2013 with the aim of facilitating fund raising by SMEs. Using this platform, SMEs could raise funds by listing and trading their securities in a SME Exchange without being bogged down by the heavy compliance & regulatory requirements of an initial public offering.

Through the changes now approved by SEBI, the ITP has become available to any start-up that wishes to raise capital by complying with the simplified norms. This raises some questions that may be pertinent to start-ups/entrepreneurs.

a) WHO IS ELIGIBLE?

Companies where Qualified Institutional Buyers (QIBs) hold certain percentage of pre-issue share capital:

Type of companies

% pre-issue capital held by QIBs

Technology Companies


At least 25%

Non-technology Companies

At least 50%


Now, for the purpose of easy understanding,

  • QIBs include Venture Capital (VC) funds, Alternative Investment Funds (AIFs), Foreign Venture Capital Investor (FVCI), Foreign Institutional Investors (FII), Insurance Companies, Banks, Mutual Funds etc.
  • “Technology Companies” are those that are intensive in their use of technology, information technology, intellectual property, data analytics, bio-technology, nano-technology etc. to provide products, services or business platforms with substantial value addition.
  • Non-technology Companies are those that do not meet any of the qualifiers for “Technology Companies”.

b) WHO CAN INVEST?

Companies cannot target retail investors through this platform. The platform only permits two types of investors:

  • Institutional Investors which include QIBs, family trusts, and other SEBI registered intermediaries having net worth in excess of INR 5000 million; and
  • Non-institutional Investors (NIIs) other than retail investors.

c) HOW WILL THE ISSUE BE PRICED?

While SEBI acknowledges that standard valuation parameters such as P/E ratio, EPS etc. may not be relevant for such companies, it has indicated that the basis of issue price shall be disclosures as deemed fit by the company other than projections. So it appears that metrics such as Gross Merchandise Value, revenue per customer, customer acquisitions or similar valuation parameters adopted by VC/PEs can be utilized.

d) HOW MUCH CAPITAL CAN BE RAISED?

Although there is no upper limit per se, SEBI has prescribed a minimum application size of INR 1 million and a minimum of 200 allottees. This means that the issue size should be INR 200 million or more.

e) IS THERE ANY APPLICABLE LOCK-IN?

The entire pre-issue capital shall be locked-in for a period of 6 months.

f) IS THERE ANY RESTRICTION ON SHAREHOLDING?

No person either individually or collectively with persons acting concert shall hold 25% or more in the post-issue share capital. This thus means that promoters too must dilute their stakes to below 25%.

g)  ARE THERE ANY FILING REQUIREMENTS WITH SEBI?

Companies are required to file a draft offer document with SEBI in line with SEBI (ICDR) REGULATIONS, 2009.

h)  CAN A COMPANY MIGRATE TO THE MAIN TRADING PLATFORM?

Yes, after a period of 3 years, provided the Company is able to meet the eligibility criteria for listing at the time. With the changes approved, the hunt for an alternative platform with simplified norms for fund raising by start-ups seems over

However, the revised regulation is yet to be notified. It remains to be seen if SEBI’s intent to make it easy for qualified start-ups to raise capital in India translates into on-the-ground investments by various institutional and non-institutional investors, thus boosting the innovation ecosystem as well as feed into larger themes such as Make in India and Digital Transformation.


Disclaimer:

This write-up is meant for general informational purposes only. It is the author’s personal view and should not be considered as the firm’s view.


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