Start-up IPOs to be out of small investors' reach

Sebi sets minimum investment size of Rs 10 lakh; minimum trading lot set at Rs 5 lakh

The Securities and Exchange Board of India has prescribed a ticket size of one million rupees (Rs 10 lakh) for individual investors who want a piece of the start-up pie.

The move has been included as part of Sebi’s proposed new regulations for start-up companies to list domestically.

The regulator released a discussion paper on a new framework for such companies on Monday evening.

Sebi has proposed a separate platform to benefit companies, especially in the technology and e-commerce space, to raise capital and list in the home market without much difficulty.

As the regulatory safeguards will be lenient compared to listing on the main bourse, Sebi has strived to discourage small investors from investing in such companies.

“The start-up platform will mainly be for institutional investors and other investors will need to have a minimum investment ticket size of Rs 10 lakh (Rs 1 million).

“Those investing less than that will not be permitted,” said Sebi chairman U K Sinha.

He was speaking on the sidelines of the Confederation of Indian Industry’s sixth capital market summit.

The move on a million-rupee ticket size will help keep the high-risk investment out of the hands of smaller, unsophisticated players, say experts.

“The high ticket size will ensure that high net worth and institutional investors, who understand such companies, will be able to invest.

“It will be too big a risk for an investor wanting to invest just Rs 50,000,” says Sanjay Israni, partner, Rajani, Singhania & Partners.

“Such businesses are generally funded by sophisticated investors.

“A high ticket size will help keep it out of reach of the small investor who may not necessarily be as well informed,” says  Gautam Gupte, director, Ambit Corporate Finance.

The discussion paper also says that trading in the company would only be allowed with a minimum lot of Rs 5 lakh.

The discussion paper mentions that as much as 75 per cent of the allotment would be to institutional shareholders, with the remainder to non-institutional investors.

No single institution would be allowed to hold more than 5 per cent, and every issue would have at least 500 investors.

Companies must remain listed for at least a year, after which they would have the option of migrating to the main board.

“New-age companies having innovative business models and belonging to the knowledge-based technology sector, where no person (individually or collectively with persons acting in concert) holds 25 per cent or more of the pre-issue share capital, may be considered as professionally managed companies and access capital through the said institutional platform,” said the Sebi paper.

The lock-in would be for all pre-IPO shareholders, for a period of six months. The main board requires a three-year lock-in for promoter shares.

Companies need not go into details of how the money would be put to use, and can merely say ‘general corporate purposes’ under the required disclosures.

Institutional investors will include non-bank finance companies, family offices and alternative investment funds, according to the Sebi paper.

Disclosures would also require to be made on creditors, about group companies and pending litigation.

The move to have a separate platform for trading of such companies, different from the main board for the regular listed companies, is likely to have an impact on liquidity, according to experts. 

“The only negative aspect of this start-up framework is that they will be listed separately and will not be part of the main exchange.

“You won't see much trading in them till the time they come to the main board. . . Exempting promoters from the three-year post-IPO lock-in is important.

“These are high growth companies and are in regular need of investments. The lock-in exemption will also help promoters monetise,” said Israni.

GETTING STARTED

Differences between start-up listing and normal listing

MINIMUM INVESTMENT SIZE

Start-ups: Rs 10 lakh

Main bourse: Rs 10,000 to Rs 15,000

MINIMUM VALUE THAT CAN BE TRADED

Start-ups: Rs 5 lakh

Main bourse: No prescribed minimum level; even a single share can be traded

POST-IPO LOCK-IN

Start-ups: Six months for all shareholders

Main bourse: Three years for promoters

PROFITABILITY TRACK RECORD

Start-ups: Can be loss-making

Main bourse: Average pre-tax operating profit of Rs 15 crore for the past three years

DISCLOSURE REQUIREMENTS

Start-ups: Relaxed

Main bourse: Strict

CAN THEY BE PART OF BENCHMARK NIFTY, SENSEX?

Start-ups: Not eligible

Main bourse: Eligible