Startup funding: Sebi keeps retail investors away but casts HNIs, QIPs as venture capitalists
The SEBI discussion paper believes that by giving considerable latitude to new-age companies, we would be able to keep them in India and not drive them to foreign bourses like NASDAQ of the USA and Singapore stock exchange. May be, but investors in financially literate economies do not suffer fools or crooks
Capitulating to the well orchestrated demands of the Indian Software Product Industry Round Table (ISPIRT), a body dedicated to promote existing Indian software product companies, and Association of Investment Bankers of India (AIBI), the market regulator Sebi proposes to make life much easier for new age companies in the matter of equity fund raising.
New-age companies are those having innovative business model and belonging to knowledge-based technology sector---software product development, e-commerce, new-age companies having innovative business model, etc. which create new business opportunities or which serve important efficiency enhancement in existing business activities—to quote the Sebi discussion paper on the subject.
Hitherto, the Institutional Trading Platform (ITP) was available only for trading but thereafter it will be available for private placement to Qualified Institutional Buyers and High Net worth Individuals (HNI) as well. Companies have the choice to migrate to the main trading platform (where even retail investors can buy and sell) after one year in the esoteric ITP. Decks have already been cleared for cocooning the public from the public issue process by making it clear in the Companies Act 2013 that while private placement normally means restricting the subscribers to 50 persons, QIBs would remain untrammeled by the restriction.
The immunity proposed to be granted to new-age companies are so revolutionary that they turn the concept of prospectus on its head. It is a salutary principle of company law that prospectus should make all relevant disclosures including the objects of the company. But the new age companies need to state only their broad objects without going into the nitty-gritty. What they plan to do with the funds can be kept a trade secret on par with their business plan and the concomitant technology. Since the investors are not greenhorns but instead well informed they are supposed to make do with whatever the company deigns to disclose. They know that these esoteric companies will bleed themselves white a la our film heroes who bravely take devastating knocks from the villains before unleashing a retaliatory blitz. Therefore they do not expect disclosure of EPS and other financials which they expect from the old-age companies. The normal lock in period of three years for promoters would stand reduced to just six months for the promoters of new age companies.
Come to think of it, the SEBI seems to have cast the QIBs and HNIs in the role of venture capitalists and the likes of Flipkart as venture capital undertakings. Are all QIBs and HNIs invariably suited for this role? A venture capitalist takes enormous risks by providing seed and startup capital and bides his time to exit with a handsome reward gotten through hefty premium on IPO cum offer of share by him. It is not uncommon for him to lose. Are employees’ provident funds in a position to take on this risk given the fact that the Sebi's definition of QIBs includes such funds as well?
Sebi must however be complimented for keeping retail investors away from the new age companies that build up losses along with their brands. It is another matter though that the same SEBI thinks nothing of casting the same retail investors in the role of venture capitalists when it comes to old-age companies---even losing companies including the ones that haven’t gone on stream can make public issues through the 100% book building process in which the QIBs play the pied piper role.
The SEBI discussion paper believes that by giving considerable latitude to new-age companies, we would be able to keep them in India and not drive them to foreign bourses like NASDAQ of the USA and Singapore stock exchange. May be, but investors in financially literate economies do not suffer fools or crooks. They vote with their feet at the first whiff of business model gone sour or any hint of crookedness. Ask Ramalinga Raju of Satyam Computers whose American Depositories Receipts (ADR) investors blew the lid of the monumental window dressing operations that was carried out by him and sent him to the slammers.
The bottom line would be increasing marginalization of the small investor. In old-age companies they get 35% of the issue and that too only if they are willing to toe the price line determined by QIBs and now in new age companies they would be completely ousted. Time was when primary market was hailed as the place for the small investor to graduate from. Of course he can invest in mutual funds which form part of the QIB charmed circle.
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