New age companies and SEBI's recommendation for new rules

New age companies and SEBI's recommendation for new rules

Question - Startups and entrepreneurial ventures are a form of new age companies which fuel job creation as well as economic progress. Discuss the SEBI consultation paper which seeks new rules for these companies.

SEBI has recently issued a consultation paper which proposes separate rules for new age companies such as startups.

• These rules aim at providing an alternative trading platform in the domestic stock exchange for startups as well as other new age firms such as e-commerce and product development companies

• Fresh norms have also been proposed for raising capital by these companies as per SEBI

• SEBI has prescribed the minimum size of retail investment to be INR 10 lakh and each trading lot to be INR 5 lakh

• SEBI has also proposed that only 2 categories of investors will be allowed to make investments in these companies namely:

- Qualified institutional buyers
- Non-institutional investors

Why Fresh Rules Are Needed for New Age Companies?

• New norms are being considered for these companies as they cannot access domestic capital markets

• New rules re needed because ventures in the category of new age companies cannot tap the capital market through conventional routes such as initial public offerings

• Moreover, new age companies also may want to raise money for motives other than financing infrastructure such as land and machinery

• Many of these companies lack dominant promoters as well

• Difficulties in listing shares have forced many of these firms to list on overseas exchanges and a domestic alternative to this is needed

• New age companies also deserve differential treatment from stock markets and regulators because of their unique nature

• New age firms follow an innovative business model and are associated with the knowledge based technology sector where no individual or collective unit can hold 25% or more of the pre-issue capital and access capital through an institutional platform

• Their business model also differs from other companies in India in that their aim is growth in size, not profits; therefore, they incur losses though many of them are larger than brick and mortar companies whereas in India, a 3 year track of profits is a essential condition for public issue

• Primary market rules will be amended for permitting loss making new age companies to float an IPO, according to SEBI while many categories of investors will be eliminate; only wealthy investors will be deemed suitable for investing in high risk new age companies

• The degree to which promoter’s shares are to be locked varies from 3 years in more conventional cases to 6 months for startups, as per SEBI

• Another contention is that for new age companies, the disclosure norms should be less rigorous than for conventional share issuers; only general details have to be discussed for share offering in sharp contrast to wide disclosure mandated by SEBI for other firms

• While conventional firms have to list within the IPO as to how the money will be deployed, new age issuers need merely state that money has to be used for general corporate purposes

Facts and Stats

• New rules for such new age companies will be notified once SEBI receives feedback

• An incentive for listing companies abroad is that the sheer size of the capital markets there is an added bonus;

• New age companies require unconventional funding which means they need large investors

• NASSCOM Startup report 2014 states that India currently has 3100 technology and digital startups

• It also holds that India has the third largest startup ecosystem internationally adding 800 startups per year

• It is estimated that India will have 11,500 startups by 2020 employing close to 2.5 lakh persons

• In the past few years, the report states that India has seen 300 VC/PE and 225 angel investment deals worth USD 2 billion in the startup ecosystem

• Top 6 locations for a majority of the startups are Bangalore, Delhi-NCR, Mumbai, Hyderabad, Pune and Chennai.

• Average age of founders is around 32 years with more than half of them being postgraduates

• Around 6% of the startups have women founders