Highlights
SEBI Updates: Relaxation of Listing Regulations for Startups
The focus keyword for this article is “SEBI relaxed listing regulations”.
Overview of SEBI’s Changes for Startups
The Securities and Exchange Board of India (SEBI) has introduced significant changes to its public listing regulations, aiming to support startups through improved conditions regarding employee stock options (ESOPs) and reverse-flipping back to India.
Changes to ESOP Regulations
One notable alteration pertains to the way ESOPs are handled during the initial public offering (IPO) process. Previously, if a founder was designated as a promoter, they were prohibited from retaining or utilizing ESOPs after the IPO filing. They were required to relinquish these benefits prior to going public. However, the new regulation permits founders to retain and use ESOPs as long as they receive them at least one year before the submission of the Draft Red Herring Prospectus (DRHP). This adjustment provides founders with increased flexibility, keeping them motivated throughout the IPO journey.
Reverse-Flipping Regulations Simplified
SEBI has also streamlined the process for startups transitioning their company structure from abroad to India, commonly referred to as reverse-flipping. Previously, investors holding shares derived from the conversion of specific securities (known as Compulsorily Convertible Securities or CCS) were barred from participating in the company’s Offer for Sale (OFS). With the new regulation, SEBI now allows such shares to be included, facilitating easier fundraising for these companies through public markets.
The regulator has relaxed its stipulations regarding who can contribute to the required minimum promoter shareholding during an IPO. Previously, only promoters were permitted to offer converted CCS for this purpose. Under the revised framework, key investors, including venture capital funds, banks, and significant shareholders, are also able to offer their CCS, contributing to the minimum promoter shareholding requirement.
Implications of the New Regulations
These updates form part of SEBI’s broader initiative to simplify the public listing process for companies. The regulator has mandated that certain shareholders, such as promoters, employees, and key managers, convert their shares into electronic (demat) form prior to filing IPO documents to enhance transparency and mitigate fraud.
The impetus for these changes follows criticism of previous regulations that allowed several startups with unsatisfactory financial standings to list in India, prompting SEBI to reassess its policies. The regulator has tightened criteria to demand greater transparency regarding potential conflicts of interest among promoters, key investors, directors, and third-party service providers, among other measures. Recent amendments also aim to ease the delisting of public sector units (PSUs) with over 90% government ownership.
SEBI’s latest initiatives are poised to significantly bolster the startup ecosystem, offering substantial benefits to stakeholders. The experience with Indian IPOs has proven to be significantly more favourable compared to listings abroad. Expanding the ownership pool through public investment entails certain responsibilities, which have in turn improved governance and compliance among these firms. Notable startups like Razorpay, Meesho, Groww, and Pine Labs will reap the benefits, with additional companies ready to enter the market. Some estimates suggest nearly $10 billion in fundraising initiatives are planned through the IPO route in India from startups in this financial year.