Exits
Proposed IPO Norms for Startups Could Lead to More Exits and Funding Boost
In a recent move poised to transform the landscape for Indian startups, the Securities and Exchange Board of India (SEBI) has introduced proposed norms that could significantly impact how startups approach Initial Public Offerings (IPOs). These changes are aimed at enhancing exits and boosting funding from qualified institutional buyers (QIBs), potentially reshaping the financial strategies of emerging businesses in India.
Encouraging Exits Via the Innovators Growth Platform
Traditionally, institutional investors in Indian startups have predominantly relied on lateral stake sales as their primary form of exits. However, SEBI's newly proposed norms for listing on the Innovators Growth Platform (IGP) could change this trend. The IGP, a platform designed specifically for high-growth and innovative companies, might soon become a more viable option for startups seeking exits through public markets.
The SEBI consultation paper outlines several key proposals that could make the IGP more attractive. One of the notable changes includes allowing existing investors and promoters to retain their special rights on the board. This provision addresses a common concern among investors who wish to maintain a degree of control and influence over the companies they invest in, even after going public.
Additionally, institutional investors have been advocating for more accessible exit channels for Indian startups, and the IGP platform seems to be an answer to these calls. The proposed norms suggest that investors could hold 25% of the pre-issue capital for a year, providing a stable transition period post-IPO.
Boosting Funding From Qualified Institutional Buyers
One of the most impactful aspects of the proposed norms is the potential increase in funding from QIBs. SEBI's proposal allows startups to allocate up to 60% of the issue size on a discretionary basis before the issue. This flexibility could attract more significant investments from institutional buyers who have the resources and interest in supporting promising startups.
Moreover, the exemption of Alternative Investment Fund (AIF) Category II investors from a post-issue lock-in requirement of six months further enhances this appeal. By removing barriers that have previously deterred some investors, SEBI aims to encourage more active participation from a diverse range of institutional investors.
Furthermore, the reduction in the requirement of pre-issue capital held by institutional investors from 50% to 25% lowers the entry barrier for new investors. This change is expected to facilitate a more inclusive investment environment, promoting a more dynamic flow of capital into the startup ecosystem.
Opening Up to a Broader Range of Investors
The proposed norms also expand the eligibility criteria for listing on the Innovators Growth Platform. Firms backed by family trusts with a net worth of at least Rs 500 crore, regulated foreign investors, and accredited investors can now consider listing on the IGP. This expansion is designed to attract a broader spectrum of investors, including those with significant financial backing and expertise.
By removing the clause that disallowed any person from holding more than 25% of post-issue capital in startups, SEBI is encouraging big-ticket investments. This change could pave the way for substantial capital inflows from both domestic and international investors, further strengthening the financial backbone of Indian startups.
Reforms Beyond the IPO Norms
SEBI's recent announcements also include several other reforms that complement the proposed IPO norms. For instance, the board has approved norms for listing tech-oriented startups and new-age companies on exchanges. This move aligns with the government's vision of promoting innovation and entrepreneurship as key drivers of economic growth.
In addition to the IPO-related changes, SEBI has introduced reforms allowing mutual funds to segregate distressed assets. This measure aims to protect investor interests and ensure the stability of the mutual fund industry, which plays a critical role in the broader financial ecosystem.
Other notable reforms include minor tweaks for IPO launches and the relaxation of investment limits for foreign investors. These changes are part of a broader effort to make India's financial markets more accessible and attractive to global investors.
The proposed IPO norms for startups could mark a significant turning point for the Indian startup ecosystem. By fostering more exits and attracting increased funding, these changes have the potential to reshape the landscape for high-growth companies in India, enabling them to scale up and compete on a global stage.