Sebi moves to spur entrepreneurship, but too many questions remain

A day after the Securities & Exchange Board of India (Sebi) cleared fresh norms for angel funds and allowed startups and small and medium enterprises (SMEs) to be listed on bourses without making an initial public offer, the overall entrepreneurial ecosystem seems to have reacted positively to the changes.

The two steps, viewed together, give credence to the fact that finally, the policy environment is beginning to recognize the enormous contribution startups, SMEs and angel investors make to the economy, and the enormous difficulties new ideas face in scaling up and attracting investments.

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However, there are some areas where angel investors say they need more clarity from Sebi and some stipulations which may either prove counterproductive or problematic, going forward.

The Sebi norm saying that an angel fund must have a three-year lock-in in an investee company has not gone down too well with angel investors. They see it as a needless restriction and will constrain investors who may want to exit once the startup is on its feet and doing well.

Says Ravi Kiran, co-founder at VentureNursery, an angel-backed accelerator: “We feel the market should decide the exit timing. If an investee company does well, the fund should be allowed to exit through any of the market vehicles such as secondary sale, strategic sale or merger.” Kiran points out that a regulator driven lock-in may introduce distortion and is vulnerable to manipulation and can actually work against start-up promoters, who this regulation is intended to serve.

The other stipulations - that an angel fund cannot invest in a company which is more than three years old, and that the minimum amount of investment must be Rs 50 lakh, have also caused concern. Angel investors say there is no reason why a regulator must stipulate when a company needs funding, and it can happen that a company requires angel funds even after being in business for three years. “This should be at the discretion of the company, not the market regulator,” says an angel investor. The minimum amount stipulation is questioned by VentureNursery, which says it can happen that a company needs less money, not Rs 50 lakh, and so stipulating this amount would not be correct.

While Sebi has also stipulated eligibility criteria for who can participate in such angel funds, angel investors have not reacted positively to the stipulations which say that investors can be senior management professionals with 10 years experience, experienced serial entrepreneurs or those with experience in investing in early stage companies. Angel investors feel these criteria are restrictive and may constrain the flow of angel funds into companies.

However, the overall reaction is positive, with angel investors lauding the regulator’s move of allowing high net worth individuals to make coordinated investments by way of such angel funds.

Startups and Listing

The big plus has been the move to allow listing for startups and SMEs without the need for an IPO. This much needed exit route will come as a boon to several private equity majors and venture funds which are stuck in companies beyond their time horizons for want of the right exit route.

Though the Bombay Stock Exchange and National Stock Exchange have set up SME platforms for small companies, those are still at the nascent stage and facing their own issues besides the fact that IPOs by smaller companies are still a huge challenge.

The facility of now getting listed without IPOs in an Institutional Trading Platform (ITP), with minimum trading or investment threshold of Rs 10 lakh will keep only the informed serious investors in the game and be useful for companies and investors looking for exits. These startups and SMEs will also be exempt from the minimum 25 percent listing norm. PEs and VCs are now expected to get several of their investee companies listed through this route.

But the biggest takeaway from these two big steps from Sebi is this: finally, the government is speaking the language of the startups and angel investors. A far cry from the Budget of 2012 when the then finance minister introduced a proposal which quickly gained notoriety as the ‘startup tax’.