SEBI IPO norms a boost for start-ups: Ind-Ra
26/06/2015 14:05

Securities and Exchange Board of India’s (SEBI) decision to ease IPO norms for start-ups will encourage Indian start-ups to raise equity in the country as against tapping overseas markets, says India Ratings and Research (Ind-Ra).

The agency, however, cautioned that relaxed disclosure requirements and shorter lock-in periods for promoters may pose a risk. Though, easier exit through a public listing may cause start-ups to attract more investors than has been the case in the past.

The new norms allow Category I and II Alternative Investment Funds (AIF) to invest a minimum amount in unlisted securities. Investments in such listed start-ups may be treated as investment in ‘unlisted securities’ for such purposes.

Start-ups will be traded on Institutional Trading Platform (ITP) where the minimum trading lot will be Rs 1 million, ensuring participation by investors who have a higher ability to withstand losses than retail investors. SEBI has provided flexibility on deciding the basis of issue price as deemed fit by issuers. As such, most start-ups do not have sufficient earnings and would not be able to use standard valuation parameters such as price to earnings or earnings per share.

Even institutional investors find valuations difficult, and to that extent the liquidity of such trades will be significantly affected. However, the agency expects confident start-ups with aspirations for entering into the main exchanges after three years to voluntarily go for a higher level of disclosures to build confidence in market participants.

Additionally, one needs to be wary of corporates taking advantage of such flexibilities to raise capital for spurious reasons. A rare errant promoter may exhibit a lack of accountability since the lock-in period for promoters and other pre-listing investors has been reduced to six months, as against three years for other companies. Insofar, the economic viability of most start-ups may be difficult to assess. Thus, all concerned should be cautious that the current mode of capital raising is not misused for saving taxes or making other gratuitous payments.