5 Things You Need To Know About SEBI's New Rules That Make It Way Easier To Take Startups Public

24/06/2015 9:32 AM IST | Updated 15/07/2016 8:25 AM IST
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To go with story 'India-economy-technology-business-investment' by Salil Panchal In a picture taken on May 7, 2013, Indian software developer and entrepreneur Nischal Shetty (R), who developed Twitter application 'justunfollow', poses in his office in Vashi on the outskirts of Mumbai. It is seen as a land of entrepreneurs, economic growth and huge business potential, but India appears to be failing its promising startup companies which are struggling to find investors. AFP PHOTO/ PUNIT PARANJPE (Photo credit should read PUNIT PARANJPE/AFP/Getty Images)

This might just be the best time for startups in India.

The Securities and Exchange Board of India, the nation's stock market regulator, said Tuesday that startups will have a separate trading platform for listing, as part of measures to encourage them to list in India rather than in bourses abroad.

Here are five most important changes you need to know about:

1. Startups in areas such as analytics, information technology and biotech can now list on the Institutional Trading Platform of exchanges, if atleast a quarter of their pre-issued capital is held by qualified institutional buyers (QIB) - like private equity and venture capital firms or non-banking financial companies. Other startups, which are not in the tech sector, can also list on the platform but will need a more stringent requirement: half of their pre-issue capital should be held by QIBs.

2. A startup does not need to be profitable before listing. Earlier rules said that any company must show profits for three years before they can list on the stock exchange. "This is the most important step," said Yogendra Vasupal, CEO, Stayzilla, a Chennai-based startup that allows users to book accommodation across hotels in India. The company raised $20 million in funding from Nexus Venture Partners and Matrix Partners in February. "Startups can now list, and raise funds from foreign institutional investors without being profitable, which they generally aren't in first few years," Vasupal said in a phone chat with HuffPost.

3. Startup founders' shares will be locked in only for six months now, instead of the earlier period of three years, after listing. That would give more incentive for founders to list their company. However this might not really make a big difference, because founders might be looking at a 3-4 year time horizon anyway before deciding the company's future strategy.

4. Disclosure norms have been relaxed. This move will directly help startups, which were earlier uncomfortable with existing disclosure norms that might have required them to reveal more about their business than they would like to at that stage. Also, stringent disclosure norms would require dedicated teams to manage regulatory requirements, something that large companies do, but might be unaffordable for startups. "Creating that kind of team is not possible for startups, and deterred them from listing. The new rule will allow startups to continue their work without worrying about competitors stealing their idea," said Vasupal.

5. Venture capital firms and angel investors will now be able to exit easily. "The availability of exit options will increase liquidity in the system which in turn will draw more investors toward India,” said Sudhir Sethi, chairman of IDG Ventures India. "These norms should have been implemented 3-5 years ago. It would be huge if Indian institutional investors put in even 2-5 percent of their portfolio in Indian startups," Vasupal said.

India, with over 3,100 startups, is ranked fifth in the world after the United States, the European Union, Canada and China. The e-commerce space and taxi-hailing app sectors are the most active, as global investors such as Softbank and Tiger Global pumped in $5.2 billion in funding to tech startups — like Flipkart, Snapdeal, PayTM, Ola — last year.

"They (startups) felt the regulatory regime in this country was not favourable for listing in India. So we have made very special provisions for such startup companies," said SEBI chairman UK Sinha at a press conference following the announcement of new rules.

The changes will come into effect from January 1, 2016. The minimum application size and trading value of such issues would be Rs 10 lakh, to deter retail investors from taking on higher risk. "We have given them (startups) a lot of freedom such as diluted disclosures, etc, but we are not allowing retail investors to come in," Sinha said. "These are companies with no profitability track record."

(With agency inputs)

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