Grey areas remain in SEBI’s alternate capital raising platform

26th May 2015
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In a discussion paper released by Securities and Exchange Board of India (SEBI) in the last week of March which invited public comments, it had discussed available and potential capital raising platforms for specified ‘new-age’ companies.

SEBI has reasoned that the need for a different platform arose for specified companies that are into software product development, e-commerce and companies that have an ‘innovative business model’ , those that do not incur profits in the initial years but have the potential to grow in a short span.

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Therefore, SEBI has proposed certain modifications to the regulatory framework of the existing institutional trading platform (ITP). While not going into the nitty-gritty of the proposed relaxations to enable better access to capital for companies in the specified areas, broadly, there will be only two types of investors -- qualified institutional buyers and non-institutional investors, and the list will be for a minimum period of one year.

One presumes that the new platform will therefore operate for these specific companies while the existing ITP will operate for the other companies that do not fall under the specified category.

Therefore, it would be important here to define what exactly knowledge-based technology sector comprises. The discussion paper provides broad categories: companies that are in the area of software product development, e-commerce, and new-age companies having innovative business model, etc. which create new business opportunities or which service important efficiency enhancement in existing business activities.

Such a classification is rather vague. An innovative business model can be subjective and so it becomes necessary for SEBI to specify what exactly this encompasses. Furthermore, what is not clear is whether these companies will have a choice to raise capital in either of the ITPs.

It would also be good if SEBI shared its learnings in a quantitative form from its experience of the existing ITP. In the recent past, SEBI’s international advisory board (IAB) held a discussion where, among others, it deliberated the regulatory framework for market financing for tech startup companies. The observations of the IAB while not being extraordinarily visionary seem practical. Entry barriers for the type of investors and the requirement of adequate disclosures are logical inputs. The IAB has also recommended that licensed sponsors could assist in strengthening corporate governance of startups which would be beneficial.

Despite the relaxations, it will be interesting to see if Indian companies would indeed opt to use the proposed platform to raise capital given various reasons of companies to list abroad. The key is to perhaps start gauging the effectiveness of the existing ITP. Some articles floating on the internet suggests that regulations for the new platform are expected to be announced mid-June. We can only wait and watch to see whether this is the case.

 (Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the views of YourStory.)

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