Sebi panel's suggestions could make start-up listing easier

For entrepreneurs or start-up founders, who have done several rounds of fundraising and end up holding less than 20 per cent in the venture, doing a public issue in the stock markets could soon become easier as an expert committee has recommended certain changes in the regulatory framework to facilitate the listing of such firms.  

An ‘Expert Committee For Facilitating Ease Of Doing Business And Harmonization Of The Provisions Of ICDR And LODR Regulations’, set up by the capital markets regulator Securities and Exchange Board of India (Sebi), has highlighted the fact that start-ups or firms promoted by entrepreneurs often suffer from low promoter holding and hence are unable to launch an initial public offer (IPO) as current regulatory framework mandates a minimum promoter contribution of 20 per cent. 

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Regulation 14 of the ICDR -- The Sebi (Issue of Capital and Disclosure Requirements) Regulations -- requires promoters of a company to contribute 20 per cent of the post-offer paid-up equity share capital, on a fully-diluted basis, as the minimum promoters’ contribution.  

“It was observed that companies promoted by entrepreneurs often have several rounds of funding prior to listing of their equity shares on the stock exchanges. In such situations, the promoters’ holding may fall short of the minimum promoter contribution i.e., 20% of the post-offer equity share capital,” stated the report. 

To address such issues, the committee has suggested that any non-individual shareholder that holds five per cent or more of the post-offer equity share capital can be permitted to contribute towards the shortfall in minimum promoters’ contribution, subject to the existing maximum of 10 per cent, without being identified as a promoter.  

Meanwhile, the committee that was formed under the chairmanship of S K Mohanty, a former whole-time member of Sebi, has also suggested equity shares arising pursuant to the conversion of fully paid-up, compulsorily convertible securities that have been held for a period of at least one year prior to the filing of the DRHP can also be eligible for minimum promoters’ contribution. 

“This is based on the… rationale that the capital (i.e., the convertible securities) had been in existence and held for a period of at least one year prior to the filing of the DRHP. The compulsorily convertible securities should be converted into equity shares prior to the filing of the red herring prospectus,” stated the committee report. 

Among other things, the committee has also given recommendations on issues like filing up of vacancies of key management personnel, timeline for prior intimation of board meetings, and the manner of applicability of LODR -- Sebi (Listing Obligations and Disclosure Requirements) Regulations – on the basis of market capitalisation among other things. 

The regulator has sought public comments on all the recommendations while fixing February 1 as the last date for submitting the comments.