By Rashna Jehani
The Securities and Exchange Board of India (‘SEBI’) has by its circular dated 22nd May, 2019 (‘Circular’) come out with a framework for the accreditation of investors seeking to invest in start-ups listed on Innovators Growth Platform (‘IGP’). The IGP, earlier known as Institutional Trading Platform, has been created to facilitate listing of start-ups and new-age ventures in sectors such as e-commerce, biotechnology and data analytics. The framework is promising and will help involve start-ups with the public markets. The framework includes the eligibility criteria, procedure to be followed for recognition as an accredited investor (‘AI’) and the tenure of validity of accreditation.
Key features
Purpose: The recognition of “Accredited Investors”- who are eligible to hold up to 25%[1] of the pre-issue capital of the issuer company to be listed on the IGP.
Eligibility: Individual with a gross income of INR 5 million annually and who has a minimum liquid net worth of INR 50 million or is a body corporate with net worth of INR 250 million is eligible to be an AI.
Process for Accreditation: The investor having a demat account has to make an application in the prescribed manner to the Stock Exchange/Depository or brokers/depository participants along with documents enlisted[2] in the Circular.
Validity: Accreditation is valid for 3 years from the date of its issuance unless the accredited investor becomes ineligible due to change in his/its financial status. Such ineligibility must be notified to the relevant stock exchange/depository.
Merchant Banker’s Role: The Merchant Banker shall ensure diligence as regards the eligibility of the AI and that its holding in the company is in compliance with SEBI (Issue of Capital & Disclosure Requirements) Regulations, 2018 at the time of the company making an application to the IGP for listing.
Implementation of Framework: Stock Exchanges and Depositories are directed to implement the accreditation procedure within 45 days of the issuance of the Circular.
What will be the impact on start-ups, on investors and the overall fundraising ecosystem in India?
The Circular has put in place a framework that will boost the overall fundraising ecosystem in India. The inclusion of the AIs as eligible investors for the IGP platform will provide impetus to the investor community of angel investors, high net worth individuals, venture capital firms and family offices as a large part of early stage funding of a start-up is funded by these investors. It will also be beneficial for the start-ups as it will address the fundraising challenges that most start-ups face in seed and early rounds.
Given the status quo approach of SEBI in permitting equity crowdfunding platforms in India, this devises an investing platform that incentivises investors to not access crowdfunding platforms. But the ease of listing norms for the issuers on the IGP platform carries a certain amount of risk for the investors. In order to mitigate such risks, SEBI through this framework requires the investors to fulfil the prescribed criteria to qualify for investing in ventures on the IGP platform. It is therefore looking to strike a balance between risk mitigation and the need to make funding available for start-ups.
In the consultation paper on crowdfunding, to qualify as an ‘AI’ SEBI had prescribed criteria for qualified institutional buyers, companies incorporated under the Companies Act, 2013, high net worth investors and eligible retail investors. In the Circular, SEBI has only prescribed a quantitative qualification of eligibility for an AI. So an investor who meets the prescribed financial requirement and who has a demat account with a depository is qualified to make an application to the stock exchanges or depositories for recognition as an AI.
Is this on par with other international jurisdictions?
Equity crowdfunding is for start-ups and unicorn ventures looking to raise capital. Mature economies like the USA, U.K. and Canada regulate equity crowdfunding. The common thread between those and SEBI’s regulations is that both have prescribed criteria for investors. Internationally, to qualify as AIs retail clients must satisfy the prescribed financial portfolio requirements through net worth, capital instruments, assets and certifications. Further, for example in Italy, a ‘professional investor’ must hold at least 5% of the equity in a crowdfunded venture. The intention of the legislature appears to be to provide some form of comfort to the retail investors that the issue is genuine by anchoring on the professional investor’s investment. On a similar note, an AI under SEBI regulations has to be an individual with total gross income of INR 5 million annually and who has minimum liquid net worth of INR 50 million. Therefore, SEBI is trying to make the IGP platform operational as a proxy for equity crowdfunding portals, consistent with its anxiety to protect minority shareholders.
This is not an apple to apple comparison as entities in India are not allowed to raise funds through equity crowdfunding platforms. There has been a proposal paper by SEBI to develop a framework for crowdfunding platform but the same has not progressed to becoming law. The intention of SEBI is to dissuade the usage of crowdfunding trading platforms by making the IGP more attractive.
While the introduction of accredited investors is a step in the right direction, a “qualitative” eligibility criteria inclusion would be worth considering in making the universe of eligible investors more inclusive. As recommended by the standing Alternative Investment Policy Advisory Committee under the chairmanship of Mr. Narayana Murthy, eligibility criteria based on acumen and investment knowledge would be in accordance with SEBI’s mandate of investor protection. Overall, this framework will encourage more start-ups and venture capitalists to explore the IGP and eventually lead to a win-win scenario for the start-ups as well as the investors.
[1]In accordance with Regulation 283(1) of the SEBI (Issue of Capital & Disclosure Requirements) Regulations, 2018