SEBI proposes easier rules for startup listings
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As startup founders typically dilute their stakes in the course of fundraises, they are often unable to meet the minimum 20% stake required post the IPO. In a discussion paper released on Thursday, Sebi has also recommended that listing regulations be eased such that the application of the regulations is more dynamic.
An expert committee’s suggestions for the ease of doing business and for the harmonisation of Sebi (Listing Obligations and Disclosure Requirements) Regulations (LODR Regulations) and of Sebi (Issue of Capital and Disclosure Requirements) Regulations (ICDR Regulations) are contained in the paper.
The consultation paper notes that the LODR regulations, which are applicable on the basis of market capitalisation, remain effective “forever” even if the figure falls and the entity moves out of top rankings. The committee has suggested that a sunset clause be added, so that if the ranking of the entity changes for three consecutive years, the regulatory provisions should cease to be applicable for the listed entity.
Additionally, the expert panel has suggested the inclusion of equity shares received on conversion or exchange of fully paid-up compulsory convertible securities and depository receipts held for more than one year, for minimum promoters’ contribution.
The compulsorily convertible securities, the committee believes, should be converted into equity shares before the filing of the red herring prospectus. Further, non-individual shareholders, who would hold 5 % or more of the post-offer equity share capital, should be permitted to contribute towards the shortfall in minimum promoters’ contribution without being identified as a promoter. This should be subject to the existing maximum of 10% limit.
As of now, such equity shares are ineligible when converted in the last one year prior to the Draft Red Herring Prospectus (DRHP).”The suggestion is based on the rationale that the capital (i.e., the convertible securities) had been in existence and held for a period of at least one year prior to the filing of the DRHP,” said the consultation paper.
The ICDR Regulation governs norms for maiden public issues, while the LODR Regulations provide the regulatory framework for all listed entities, ensuring compliance and disclosure requirements.
In order to provide ease of doing business and to provide greater flexibility, the offer for sale size can be based on either the estimated issue size (in rupee value) or the number of shares, as disclosed in the DRHP, and not on both criteria,” the committee suggested.
The committee suggested that “a director can be a member of a maximum 7 Audit Committees in listed entities… The limit of chairmanship of not more than 5 committees (which would now be chairmanship of a maximum 5 Audit Committees at listed entities) across listed entities may continue”.
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