Regulatory Framework for Capital Raising and Listing on Institutional Trading Platform

Transcription

1 Regulatory Framework for Capital Raising and Listing on Institutional Trading Platform 1.0 Objective 1.1. This memorandum seeks approval of the Board to amend the provisions of SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 ("ICDR Regulations") to propose a regulatory framework for capital raising on the existing institutional trading platform and to review the disclosure requirements for listing under the current regulatory framework. 2.0 Background 2.1. Primary Market In India ICDR Regulations were notified on August 26, 2009 in order to strengthen the regulatory framework in respect of matters relating to issue of capital. The ICDR Regulations inter-alia provides for the following: A. Capital raising by companies on the main board B. Capital raising by Small and Medium Enterprises (SMEs) C. Listing of specified securities of SMEs on the Institutional Trading Platform (ITP) in a SME Exchange without making an Initial Public Offer (IPO) The main requirements pertaining to eligibility, disclosures and other requirements for public/rights issues in the ICDR Regulations for each of the above mentioned platforms are given in Annexure - A. 3.0 Need for review 3.1. As part of the regular consultative process, SEBI in the recent past interacted with various market participants including ispirt, a body dedicated to promoting existing Indian software product companies. It was highlighted that there are around 3000 Indian start-up companies impacting nearly 3 million small businesses. They have innovative business models and their valuations are not generally understood by common investors They highlighted certain challenges facing the industry players to create a regulatory awareness of the typical needs of the industry. While recognizing the availability of SME platform for facilitating capital raising by small scale Page 1 of 13

2 businesses and presence of the novel SME-ITP to facilitate exit of institutional investors like PEs and VCs, it was submitted that these existing avenues may be further made amenable for accommodating a larger number of growing companies Further, Association of Investment Bankers of India (AIBI), an association of investment bankers in India has submitted suggestions to SEBI to facilitate raising of funds by the issuers with lower holding of founding members or where there are no promoters The institutional investors of such companies generally advise these companies to list overseas citing relaxed regulatory regime in other jurisdictions. Many of the international jurisdictions provide multiple platforms for listing. If the capital raising process in India is not made further relaxed for such issuers, they may be driven to list on stock exchanges outside India. Many of the said stock exchanges are accessed by Indian companies including technology start-ups. A brief detail on the same as stated in the 'Cross Border Listing Handbook 2014 by Baker & McKenzie' is as under: Nasdaq Stock Market (NASDAQ) Historically, NASDAQ was designed to be first electronic exchange and was designed for over the counter trading of stocks. It previously attracted smaller start-up companies which would eventually seek listing on New York Stock Exchange (NYSE). Previously, technology companies dominated listing on the NASDAQ, however, in recent times, financial, industrial, healthcare, etc now account for half of the NASDAQ listings. The NASDAQ Stock Market has three listing tiers with different listing requirements. London Stock Exchange (LSE) - AIM (Alternative Investment Market) It is an international market for smaller growing firms and was founded in The requirements suit smaller growing companies as there are no capitalisation, track-record, public float, etc. requirements. AIM companies are not required to adhere to any corporate governance requirement. Taiwan Stock Exchange (TSE) Page 2 of 13

3 At the Taiwan Stock Exchange, the listing requirements for technology oriented companies and other companies are different. The various requirements are relaxed for technology companies. Luxembourg Stock Exchange (LxSE) Historically, mainly foreign investors and Luxembourg special vehicles were listed on LxSe. This has not changed over the years. The corporate governance rules are not applicable to foreign issuer who list on LxSE. It is not mandatory for foreign issuers to be listed in its home country. Further, issuers need not demonstrate a particular length of trading history for listing on LxSE. In addition as per the recent newspaper reports, there has been discussion in China on relaxation of listing requirements for new age companies The challenge before SEBI is to simplify the capital raising process for such issuers while protecting the interest of retail investors Considering the role of such companies in nation building and their potential in terms of generating employment and income as well as fostering innovation, it is imperative that necessary enabling environment is provided for these enterprises to flourish. 4.0 Review Process 4.1. Various suggestions in this regard were deliberated in the Primary Market Advisory Committee (PMAC) of SEBI. Pursuant to the recommendations of PMAC and further discussions held with the market participants, a discussion paper on alternate capital raising platform wherein money shall be raised through a separate platform only from institutions and high net worth individuals by the new-age companies having innovative business model and belonging to knowledge-based technology sector was issued by SEBI on March 30, 2015.The said discussion paper is placed at Annexure-B A large number of comments on the discussion paper were received from startups, law firms, journalists, industry bodies, merchant bankers, academic bodies, stock exchanges, investors, investor association, etc. The idea to have a separate platform for start-ups with rationalised regulatory framework has by and Page 3 of 13

4 large been appreciated by the commentators. Some commentators have however proposed that the said platform be made accessible to all companies irrespective of the industry instead of restricting it to technology oriented companies. A few commentators have also proposed to define such companies and permit retail investors to participate in the said platform. Few commentators have suggested that companies with more than 25% holding of promoters also be permitted to access the said platform with a graded lock-in requirements The matter was also deliberated by the International Advisor Board (IAB) of SEBI. IAB inter alia, made the following observations: A relevant necessary framework is essential to enable financing of startups given their potential in India, as the economy of India is poised to grow at a faster pace Given the high-risk high-return trade-offs involved in financing of start-ups and the regulatory concerns of ease of raising capital vs. investor protection, entry barriers to ensure participation of only sophisticated investors in the initial stage is a good idea There is also a need for a balanced regulatory approach towards valuation of start-ups as conventional valuation approach may not be applicable in the early state of their operation. However, the need of adequate disclosures including suitable caution to investors about valuation cannot be overemphasized Retail investors can participate in such companies through mutual funds The said public comments were also deliberated in a subsequent meeting of PMAC. 5.0 Recommendations Based on recommendations and deliberations, it is proposed that the existing SME-ITP platform be modified in order to enable certain companies raise funds through the said platform as stated below: 5.1. Eligibility The said platform be made accessible to (i) companies which are intensive in their use of technology, information technology, intellectual property, data analytics, bio-technology, nano-technology to provide Page 4 of 13

5 products, services or business platforms with substantial value addition and with at least 25% of the pre-issue capital being held by QIBs (as per ICDR definition) or (ii) any other company in which at least 50% of the preissue capital is held by QIBs Further, no person (individually or collectively with persons acting in concert) in such a company shall hold 25% or more of the post-issue share capital Amendments to Institutional Trading Platform to enable IPO The current SME-ITP platform may be modified to include non SME companies. The platform may be called IT Platform (ITP). Companies as defined at para 5.1 will also be allowed to list on the proposed ITP with or without making an IPO subject to compliance with the conditions as proposed under the instant memorandum Companies intending to list on the proposed ITP, shall be required to file draft offer document with SEBI for observations, as provided in ICDR Regulations. The issuers shall ensure compliance with various applicable provisions in ICDR Regulations subject to the carve-outs provided in paragraphs 6 and 7 below in respect of eligibility criteria, process, lock-in requirements, etc The said platform will have two categories of investors - (i) Institutional investors (QIB as per ICDR definition and also the family trusts, systematically important NBFCs registered with RBI and the intermediaries registered with SEBI, all with net-worth of more than Rs. 500 crores) and (ii) Non-institutional investors (NII) other than retail investors. Considering the risks involved in investing in companies proposing to access the said platform, it is proposed that retail investors may not be permitted to directly participate in this platform. However, such investors may invest through mutual funds as they are covered under the QIB category In case of public offer, allotment to institutional investors may be on a discretionary basis whereas to NIIs it shall be on proportionate basis. Allocation between the said two categories shall be in the ratio of 75% and 25% respectively. Any under-subscription in non-institutional categories Page 5 of 13

6 shall be available to institutional investors category. The mode of allotment to institutional investors i.e. whether discretionary or proportionate, shall have to be disclosed at the time of filing of the RHP In case of discretionary allotments to institutional investors, no institutional investor shall be allotted more than 10% of the issue size. All shares allotted on discretionary basis shall be locked-in in line with requirements for lock-in by Anchor Investors i.e. 30 days at present The minimum application size in case of such issues shall be Rs. 10 lakhs and the minimum trading lot shall be of Rs. 10 lakhs The no. of allottees in case of a public offer shall be 200 or more The company will have the option to migrate to main board after 3 years subject to compliance with eligibility requirements of the Stock Exchanges For Category I and II AIFs, which are required under the SEBI (Alternative Investment Funds) Regulations, 2012 to invest a certain minimum amount in unlisted securities, investment in shares of companies listed on this platform may be treated as investment in 'unlisted securities' for the purpose of calculation of the investment limits Grandfathering of existing companies listed on SME-ITP 1. Presently, there are 34 companies listed in the SME-ITP (20 on BSE and 14 on NSE). The companies belong to diverse sectors such as Trading Companies and Distributors, Realty, Non-Alcoholic beverages, Internet Software and Service Providers, Education, Auto parts and Equipment, Aluminium, and Advertising & Media Agencies. The shareholding by promoters in these companies varies from around 25% to as high as 100%. 2. In order to ensure continuity for these companies, they may be grandfathered on the new ITP and may be permitted to continue to be listed on the platform subject to the conditions specified in the Chapter XC of ICDR Regulations. These 34 companies may continue to be guided by the existing regulatory framework for them including applicable relaxations from compliance with corporate governance requirements. Page 6 of 13

7 6.0 Carve-outs to companies intending to list on the modified ITP 6.1. Objects of the issue ICDR Regulations require disclosure, inter-alia, of the objects of the issue, the purpose of issue, means of financing such project, etc. Further, the amount for general corporate purposes shall not exceed twenty five per cent of the amount raised by the issuer. Considering the nature of their business, the disclosure may contain only broad objects. The cap on general corporate purpose may not be applicable for capital raising in the said platform Lock-in of Shares Regulation 36 (a) of ICDR Regulations stipulates that the minimum promoters' contribution (20% of post issue capital) shall be locked in for a period of 3 years from the date of commencement of commercial production or date of allotment in public issue, whichever is later. Further, Regulation 36(b) of ICDR Regulations stipulates that promoters holding in excess of minimum promoters contribution shall be locked-in for a period of one year. Regulation 37 of ICDR Regulations stipulates that the entire pre-issue capital held by persons other than promoters shall be locked-in for a period of one year, subject to exemptions carved out for certain cases. Lock in of the entire pre-issue capital may be for a period of 6 months from the date of allotment uniformly for all shareholders Basis of Issue Price Schedule VIII - Part A (VII) (K) of ICDR Regulations requires the disclosure of the basis for issue price including disclosure of Earnings Per Share, Diluted Earnings Per Share, Price earnings ratio, pre-issue Average Return on Net Worth, etc. Page 7 of 13

8 As the above parameters may be negative and hence not relevant in case of many of such companies, the basis of issue price may include other disclosures, except projections, as deemed fit by the issuers accessing the market on the institutional platform in order to enable investors take informed decisions. The disclosures should suitably caution the investors about valuation of such companies. 7.0 Carve-outs to companies intending to list on the modified ITP as well as on the main board 7.1. Disclosure with respect to group companies Schedule VIII of ICDR Regulation states that "group companies", wherever they occur, shall mean companies, firms, ventures, etc. promoted by the promoters of the issuer, irrespective of whether such entities are covered under section 370 (1)(B) of the Companies Act, 1956 or not. Disclosure with respect to group companies shall be restricted to such group companies as covered under the applicable accounting standard (Currently, Accounting Standard 18). In addition, disclosure shall be given for such group companies as considered material by the board of the issuer. The policy on materiality should be disclosed in the offer document Disclosure of litigations Schedule VIII Part A (2) (X) (A) requires disclosures of various Outstanding Litigations and Material Developments such as litigations against the issuer, directors involving violation of statutory regulations, tax liabilities or alleging criminal offence; adverse findings on compliance with the securities laws, nonpayment of statutory dues, cases in which penalties were imposed etc. The following disclosures may be made: All criminal cases and regulatory actions should be disclosed Page 8 of 13

9 With respect to taxation disputes, separate disclosure regarding claims related to direct and indirect taxes shall be provided in a consolidated manner For other litigations, policy for materiality shall be defined by the company and disclosed in the offer document. Based on the same, disclosures shall be made Disclosures on creditors ICDR Regulations, Schedule VIII Part A (2) (X) (A) (1) (i) under the outstanding litigations requires the disclosure of the name(s) of the small scale undertaking(s) or any other creditors to whom the issuer owes a sum exceeding Rs. one lakh which is outstanding more than thirty days. Complete details about creditors should be disclosed on the web page of the company. The disclosure in the offer document should be based on materiality thresholds as defined and disclosed in the offer document and shall provide link to the webpage of the company where full details are disclosed. Only consolidated information on dues to SMEs and other creditors shall be disclosed in the prospectus Disclaimer Clause Regulation 60 (3) of ICDR Regulations requires a disclosure in all public communications and publicity material issued or published in any media during the period commencing from the date of filing draft offer document with the Board till the date of allotment by the issuer that it is proposing to make a public issue or rights issue and has filed a draft offer document. It is proposed that the product advertisements of the issuers may be exempted from the requirement of disclaimer. However, disclosure shall continue in other corporate and issue related advertisements. 8.0 Cost Benefit Analysis Page 9 of 13

10 The proposals will provide a facilitative framework for the companies including new generation companies with innovative business model to tap the capital market for their financing needs instead tapping markets in other jurisdictions. The proposals seek to simplify regulations. Thus, there appear to be no cost implications. Retail investors are not being allowed to invest in such issuers, however, they may participate in such companies through mutual fund route. 9.0 s for consideration 9.1. The Board is requested to consider and approve the proposals mentioned under paragraphs 5.0, 6.0 and 7.0 above The Board is also requested to authorize the Chairman to take consequential and incidental steps to give effect to the decision of the Board. Page 10 of 13

11 Annexure - A A. Capital raising by Companies on the main board Eligibility based on track record of profitability, net-worth and net tangible assets. However, loss making companies can also access the market, with higher allotment to institutional investors (75%) Public comments on the draft document is sought for 21 days Detailed disclosure of Promoter / promoter group. However, current regulatory framework also enables capital raising by companies with no identifiable promoters Detailed disclosure on objects of the issue with a cap of 25% on general corporate purpose At least 20% of the post issue capital to be locked in by promoters for 3 years. All pre-issue capital to be locked in for 1 year with certain exceptions Disclosure of the basis of issue price Detailed disclosure of risk factors and litigations Disclosures on group companies Re-statement of financial statements for last 5 years B. Capital raising by Small and Medium Enterprises (SMEs) To facilitate capital raising by SMEs, separate platform has been created by the stock exchanges under the regulatory framework put in place by SEBI in The following are the essential features regarding such SME issuances: Post-issue paid up capital (face value) has to be less than INR 25 crores Minimum number of allottees should be 50 Minimum IPO application size should be INR 1 lakh. Observations on DRHP are not to be issued by SEBI rather observations are issued by the stock exchanges. Issuers need to satisfy listing requirements of stock exchanges which are relaxed compared to norms meant for main board companies. e.g. in BSE platform for SME, a track record of distributable profits for at least two years Page 11 of 13

12 out of immediately preceding three financial years along with minimum net worth and net tangible assets is stipulated. Otherwise, the net worth shall be at least Rs. 3 crores. In NSE's SME platform, a track record of at least three years, positive cash accruals (EBDT) from operations for at least 2 financial years and positive net worth is prescribed. SME issues shall be 100% underwritten with mandatory market making for 3 years C. Listing of specified securities of SMEs on the Institutional Trading Platform (ITP) in a SME Exchange without making an Initial Public Offer (IPO) SEBI, in order to facilitate easier exit options for informed investors like angel investors, VCFs and PEs etc., has notified the necessary legal framework for listing and trading of the specified securities on Institutional Trading Platform (ITP) in SME Exchanges. Salient features of ITP Platform are as under a. The ITP shall be a platform for listing and trading of specified securities of small and medium enterprises including start-up companies in a SME Exchange b. The ITP shall be accessible only to informed investors who are either individuals or institutions and the minimum trading lot shall be INR 10 crore on this platform c. Companies listed on ITP shall not make a public issue of its securities d. At least one full year s audited financial statements e. Not been incorporated for more than 10 years f. Revenues of less than INR 100 crores in any of the previous financial years g. Paid up capital of less than INR 25 crores h. Certain minimum level of investment from specified category of investors such as AIF, VC etc. ****************** Page 12 of 13

13 Annexure B Discussion Paper on 'Alternate Capital Raising platform and review of other regulatory requirements is available on the website of SEBI. Page 13 of 13