Many initiatives have been undertaken in the recent years for facilitating direct listing and consequent public trading of startup securities in India. In January 2010, Prime Minister’s Task Force recommended to set up a dedicated stock exchange for small and medium enterprises, which eventually led to the genesis of the SME Exchanges, NSE EMERGE and BSE SME platform. In our earlier Handbook on Initial Public Offering: SMEs, we have provided an overview of various SME platforms, benefits of SME listing and SME IPOs, list of documentation and comparatives of fees.
The rationale behind boosting SME listing could be manifold, from the perspective of all stakeholders in the ecosystem, i.e. the investors, growth stage companies, and the exchanges. The biggest impetus would be the greater access to sophisticated investors and wider portfolio base and investment opportunities for investors of both ‘Main Board’ and SME Exchange Platforms. This is also attractive from the perspective of providing exit opportunities to eligible existing investor base. As mentioned by the Managing Director of NSE, Mr. Vikram Limaye, “… a lot of money has been invested in start-ups and some investors in these companies may want to exit in the next 12-14 months…it is only appropriate for them to list in India and give an opportunity for the domestic investors to participate in their growth,”
However, for various reasons, the SME platforms have not taken off or seen the traction that was envisaged during their formation. The eligibility criteria of companies with less than INR 25 crore in equity capital and those which have raised less than USD 4 million in external funding have been often cited to be the most crucial one of them. Many of the Startups would have already raised large amounts of external funding from the now extensive venture capital and private equity fund base. Minimum promoter holding requirement is another set back as more often than not, a post Series B or Series C entity would have a diversified capital table where the initial subscribers’ holding could be much lesser than the required norms, with investors collectively or individually holding largest single block stakes in these companies. However, these companies might still not be matured enough to have met the eligibility criteria of the traditional IPO routes for accessing capital markets.
It is in this background that discussions around revising the listing criteria for Startups started at various levels. On 27 November and 28 November 2018, BSE and NSE, respectively, released the revised norms. We have provided the details of these below.
BSE Notice No. 20181127-23 dated 27 November 2018 on Introduction of BSE “StartUp Segment”.
The applicability seems to be for “Start-up Companies” in the identified sectors of “IT, ITES, Bio-technology and Life Science, 3D Printing, Space technology, E-Commerce, Hi- Tech Defense, Drones, Nano Technologies, Artificial Intelligence, Big data, Enhance/Virtual Reality, E-gaming, Exoskeleton, Robotics, Holographic Technology, Genetic Engineering, Variable Computers Inside body computer technology and other Hi-tech based companies”.
The criteria as notified by BSE are as follows:
- Company should be registered as start-up with Ministry of Small and Medium Enterprises / Department of Industrial Policy and Promotion (MSME/DIPP). If not registered as Start-up with MSME/DIPP then the company’s paid-up capital should be minimum Rs. 1 crore.
- Company should be in existence for a minimum period of 2 years on the date of filing the draft prospectus.
- Preferably there should be an investment for a minimum of 2 years (at the time of filing draft prospectus) in the Company by:
- Company should have a positive net-worth.
- Company should not have been referred to National Company Law Tribunal (NCLT) under Insolvency and Bankruptcy Code, 2016.
- No winding-up petition must have been accepted against the Company by the NCLT.
- None of the promoters/directors of the Company must have been debarred by any regulatory agency/agencies.
However, in addition to the above, compliance with LODR requirements and Chapter IX of the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2018 [SEBI (ICDR) Regulation] is also mandated, with respect to conditions applicable for listing of SME Companies, viz. minimum application size, number of allottees etc.
NSE Circular No. 2/2018 dated 28 November 2018 on Listing Criteria for the Technology Startups on the SME Platform.
As mentioned in the Circular, “In order to facilitate technology startups with potential growth business model, to raise equity and list on Stock Exchange, NSE has formulated a criteria for listing such technology startups. These listed companies shall be operating within the regulatory framework as specified under Chapter IX of SEBI ICDR Regulations, 2018 and LODR requirements as applicable to SME Exchange.”
The major criteria as listed in the Circular are as follows:
- As conditions precedent adherence must have been made to the provisions of Securities Contract (Regulation) Act, 1956; Companies Act, 2013; SEBI Act, 1992 and regulations prescribed therein.
- Company must be incorporated in India under the Companies Act.
- The post issue paid up capital of the company (at face value) shall not be more than Rs. 25 crores.
- There must be a 3 years of track record of either:
- applicant seeking listing; or
- promoters/promoting company, incorporated in or outside India with at least 3 years of experience in the same line of business and shall be holding at least 20% of the post issue equity share capital individually or severally; or
- Proprietary / Partnership firm and subsequently converted into a Company
- Annual revenue of at least Rs. 10 crores and the issuer must have shown growth of at least 20% in the past one year. (Annual growth may be exhibited in the form of number of users/revenue growth/customer base)
- Net-worth of issuer must be positive.
- Must meet one of the following criteria:
- At least 10% of pre-issue capital to be held by QIBs as on the date of filing of draft offer document; or
- At least 10% of its pre-issue capital should be held by a member of the angel investor network or private equity firms and such angel investor network or Private Equity Firm should have had an investment in the start-up ecosystem in 25 or more start-ups their aggregate investment is more than 50 crores as on the date of filing of draft offer document.
The criteria of minimum QIB, angel network or private equity holding is interesting as this now could give a clear pathway to the Startups from very early stages on who to raise funds from. A diligence on the investors would also become necessary in such scenarios.
- The Company must not have been referred to the erstwhile Board for Industrial and Financial Reconstruction (BIFR).
- No petition for winding up must have been admitted by a court against the Company.
- No material regulatory or disciplinary action by a stock exchange or regulatory authority in the past three years must have been brought against the Company.
- Further the following disclosures will be required to be made:
- Any material regulatory or disciplinary action by a stock exchange or regulatory authority in the past one year in respect of promoters/promoting company(ies), group companies, companies promoted by the promoters/promoting company(ies) of the applicant company.
- Defaults in respect of payment of interest and/or principal to the debenture/bond/fixed deposit holders, banks, financial institutions by the applicant, promoters/promoting company(ies), group companies, companies promoted by the promoters/promoting company(ies) during the past three years. In this regard, an auditor's certificate shall also have to be provided.
- Litigation record, the nature of litigation, and status of litigation pending against the applicant company, promoters/promoting company(ies), group companies, or companies promoted by the promoters/promoting company(ies).
- Status of criminal cases filed or nature of the investigation being undertaken with regard to alleged commission of any offence by any of the Company’s directors and its effect on the business of the company, where all or any of the directors of issuer have or has been charge-sheeted with serious crimes like murder, rape, forgery, economic offences etc.
As may be noted, both the BSE and NSE Notice and Circular refer to the applicability of the SEBI (ICDR) Regulations.
Under Chapter IX of the SEBI (ICDR) Regulations, 2018 certain common criteria, irrespective of the SME Exchange sought to be listed in must be met. These are:
- the amount for general corporate purposes, as mentioned in objects of the issue in the draft offer document and the offer document should not exceed 25% of the amount being raised in the issue;
- promoters must hold at least 20% of the post-issue capital of the Company. However, if the post-issue shareholding of promoter is less than 20% then alternative investment funds, foreign venture capital investors, banks, or public financial institutions may contribute to meet the shortfall in the minimum contribution. In any case, the promoter cannot hold less than 10% of the post-issue capital;
This brings back the concerns related to minimum promoter holding as discussed above.
- the minimum promoters’ contribution as mentioned above shall be locked-in for 3 years; any promoter shareholding in excess of the above shall be locked in for 1 year;
This could be a major concern for QIBs given their internal constraints, for instance, fund exit requirements.
- apart from promoters’ pre-issue capital, the entire pre-issue capital held by persons other than promoters shall be locked in for 1 year, however this lock in period will not apply to share allotted to employees, shares held in an ESOP trust, and equity shares held by a venture capital fund or alternative investment fund (categories I and II) or foreign venture capital investor, provided that such equity shares must be locked in for a period of at least 1 year from the date of purchase by such investor.
- entering into an agreement with a depository for dematerialisation of its specifies securities already issued and proposed to be issued;
- all existing equity share capital must be fully paid up or forfeited;
- all securities held be promoters must be in dematerialised form;
SEBI’s intent to relax listing norms for Startups seems to be in the pipeline and it remains to be seen whether the realities of the Startup ecosystem are considered and reflected in the revised norms.
Authors: Ms. Sohini Mandal and Mr. Avaneesh Satyang
BSE Circular dated November 27, 2018: Available at https://www.bseindia.com/markets/MarketInfo/DispNewNoticesCirculars.aspx?page=20181127-23
NSE Circular dated November 28, 2018: Available at http://nseindia.com/content/circulars/SME39509.zip
 As defined and categorized under the Micro, Small & Medium Enterprises Development (MSMED) Act, 2006
 Yuvraj Malik, “NSE in talks with Sebi to tweak start-up listing norms”, as reported in https://www.livemint.com/Companies/giHdsfq86vtiPzngwlQSqL/NSE-in-talks-with-Sebi-to-tweak-startup-listing-norms.html on 2 March 2018
 As registered with DIPP under the Startup India Action Plan
 As defined in Regulation 2(ss) of the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2018: includes venture capital fund, alternative investment fund, scheduled commercial bank, foreign portfolio investor, et al.
 The concept of accredited investor is found in US securities law, which is similar to angel investors in India, only persons meeting the minimum net-worth criteria, professional experience and expertise requirements are recognised as accredited investors.
 By angel investor networks, the notice makes reference to angel funds, which are a sub-category of category-I alternative investment funds registered with SEBI, and angel investors are persons who propose to invest in angel funds and meet the net-worth, expertise, and experience criteria as specified under the SEBI (AIF) Regulations, 2012.
 PTI News, “SEBI To Relax Listing Norms For Startups, Rename it ‘Innovators Growth Platform’”, as reported in https://www.bloombergquint.com/markets/sebi-to-relax-listing-norms-for-start-ups-rename-it-innovators-growth-platform#gs.U99GjHQ on 9 December 2018