Sebi’s Proposal to Ease IPO Regulations: A Boon for Startup Promoters
In a significant move that could provide much-needed relief to startup promoters, the Securities and Exchange Board of India (Sebi) is advocating for a relaxation of the rules governing the minimum promoters’ contribution during initial public offerings (IPOs). This proposal comes at a crucial time when many startup founders find themselves in a challenging position due to the dilution of their stakes during fundraising rounds.
The Challenge of Minimum Stake Requirements
Typically, startup founders dilute their ownership stakes as they raise funds to fuel growth and expansion. This dilution often leads to a situation where they are unable to meet the minimum requirement of holding a 20% stake post-IPO. The stringent regulations have posed a barrier for many promising startups looking to transition into publicly traded companies. Recognizing this issue, Sebi has released a discussion paper that outlines potential changes aimed at making the IPO process more accessible for startup promoters.
Recommendations from the Expert Committee
The discussion paper incorporates suggestions from an expert committee focused on enhancing the ease of doing business and harmonizing the Sebi (Listing Obligations and Disclosure Requirements) Regulations (LODR) with the Sebi (Issue of Capital and Disclosure Requirements) Regulations (ICDR). One of the key recommendations is to introduce a sunset clause in the LODR regulations. Currently, these regulations remain applicable indefinitely based on market capitalization, even if a company’s ranking declines. The proposed sunset clause would allow for the cessation of certain regulatory provisions if a company falls out of the top rankings for three consecutive years.
Inclusion of Convertible Securities
Another noteworthy recommendation from the expert panel is the inclusion of equity shares obtained through the conversion of fully paid-up compulsory convertible securities and depository receipts held for over a year as part of the minimum promoters’ contribution. This change would enable startup founders to count these shares towards their required stake, provided that the conversion occurs before filing the red herring prospectus (RHP).
Moreover, the committee suggests that non-individual shareholders holding 5% or more of the post-offer equity share capital should be allowed to contribute to any shortfall in the minimum promoters’ contribution without being classified as promoters. This flexibility would be subject to the existing maximum limit of 10%, thereby providing a pathway for greater participation from institutional investors.
Adjustments to Offer for Sale Size
To further enhance the IPO process, the committee has proposed that the size of the offer for sale can be determined based on either the estimated issue size in monetary terms or the number of shares, rather than requiring compliance with both criteria. This adjustment aims to simplify the process and provide greater flexibility for companies preparing for their public offerings.
Governance and Committee Membership
In addition to the recommendations concerning IPO regulations, the expert committee has also addressed governance issues. It has suggested that a director should be allowed to serve on a maximum of seven audit committees across listed entities, while maintaining the existing limit of chairing no more than five committees. This recommendation aims to ensure that directors can effectively manage their responsibilities without being overburdened.
Conclusion
The proposed changes by Sebi represent a forward-thinking approach to fostering a more dynamic and supportive environment for startups looking to go public. By easing the minimum promoters’ contribution requirements and introducing more flexible regulations, Sebi is not only addressing the challenges faced by startup founders but also encouraging innovation and growth within the Indian economy. As these recommendations move through the consultation process, they hold the potential to reshape the landscape of IPOs in India, making it easier for startups to access capital and achieve their growth ambitions.