The Securities and Exchange Board of India has eased the listing process for start-ups on the innovator growth platform.
The development comes as several start-ups are gearing up for listing this year and the emergence of special purpose acquisition company (SPAC) as a listing option for Indian firms in the US.
The Sebi move
The capital markets regulator has approved reducing the period where eligible investors in a start-up prior to the public issue have to hold 25 per cent of the pre-issue capital to one year from two years earlier.
The regulator has also allowed start-ups to allocate up to 60 per cent of the issue size on a discretionary basis, prior to issue opening, to eligible investors with a lock-in period of 30 days on such shares. Further, the open offer trigger has been raised from 25 per cent to 49 per cent in the event of a takeover of a company listed on the Innovator Growth Platform.
“However, irrespective of acquisition or holding of shares or voting rights in a target company, any change in control directly or indirectly over the target company will trigger an open offer,” Sebi said.
The regulator has also relaxed the rules around the migration of a start-up listed on the Innovator Growth Platform to the Main Board of a stock exchange. Sebi said that start-ups that do not meet the conditions of profitability, net assets and net worth for migration to the main board can now do so as long as 50 per cent of the company is in the hands of qualified institutional buyers as against 75 per cent required earlier.
Delisting under the start-up framework will be considered successful if the post-offer shareholding of the acquirer, taken together with the shares tendered and accepted, reaches 75 per cent of the total issued shares of that class and at least 50 per cent shares of the public shareholders are tendered and accepted, Sebi said.
The start-up dealmaking stayed in suspension during March and June last year, but revived in the second half and by the end of 2020 about a dozen Indian start-ups had become Unicorns, the highest in any year.
Till now, except for firms including Indiamart and MakeMyTrip, Indian start-ups have not been able to go public as they are bogged down by huge annual losses. However, a few firms including Freshworks, Druva, PolicyBazaar and Delhivery have announced plans to go public
Zomato is planning for an IPO in the first half of 2021, while Flipkart may go for an IPO as soon as next year, at a valuation of $40-45 billion, more than double the $21 billion for which Walmart acquired it in 2018.
Indian startups raised about $12.8 billion across nearly 1,350 funding rounds from investors last year, as per data from Tracxn
The special purpose acquisition company (SPAC), or blank cheque companies, have emerged as an alternative to IPO route for Indian firms to list on the US bourses.
Blank-cheque companies give private companies quicker public market exposure and have become a rage on Wall Street on the back of record low interest rates and an abundance of cash from investors looking for yields.
SPACs are formed to raise capital in an initial public offering (IPO) with the purpose of using the proceeds to identify and merge with a target company. SPACs are usually formed by private equity funds or financial institutions, with expertise in a particular industry or business sector, with investment for initial working capital and issue related expenses..
SPACs have already surpassed last year’s fundraising record in the first quarter of 2021, having generated $79.4 billion globally since
the start of the year, eclipsing the $79.3 billion that flooded into these vehicles in the previous calendar year. So far in 2021, 264 SPACs have been launched, overtaking last year’s record 256. Renew Power is an Indian company that did a $4.4-billion SPAC listing recently. SoftBank-backed online grocer Grofers is currently in talks to go public in the US through a merger with a blank cheque company.
Riding on the insatiable appetite of investors flush with liquidity, Ravi Adusumalli has teamed up with Shashin Shah to launch a first-of-its-kind blank cheque company exclusively focused on Indian tech companies seeking to list in the US.
Adusumalli is one of the most prolific early-stage backers of homegrown, consumer internet companies and unicorns such as Paytm, Swiggy, MakeMyTrip, BookMyShow, Meesho, Unacademy, Rivigo and JustDial.
Shah is the founder of Think Investments. Think Elevation Capital Growth Opportunities, led by Adusumalli and Shah and incorporated in the Cayman Islands, led for a $225-million initial public offer (IPO) on Friday.
The board of this special purpose acquisition company (SPAC) consists of top names from the Indian startup ecosystem, including Paytm
founder Vijay Shekhar Sharma, Harsh Jain of Dream11 and former SoftBank executive Kabir Misra, among others. Shah and Adusumalli will be co-CEOs of the vehicle.
Sebi looks into SPACs
Earlier this year, market regulator Sebi formed a group of experts to examine the feasibility of introducing Special Purpose
Acquisition Companies (SPACs) like structures in India. The group, formed under Sebi’s Primary Market Advisory Committee
(PMAC), has been asked to submit its report at the earliest.
Sebi wants to explore the potential of SPACs while at the same time building adequate checks and balances in the regulatory framework to take care of the associated risks.
SPACs are formed to raise capital in an IPO with the purpose of using the proceeds to identify and merge with a target company. According to market experts, while SPACs have several advantages, they also raise various regulatory concerns.
For public shareholders, SPACs give the advantage of investing along with the sponsors in the SPAC like private equity type transactions.
The advantage for the sponsor is that it allows rapid deployment of capital to take advantage of opportunities. It also helps the target company acquired by the SPAC going public during periods of market instability or volatility in traditional IPO markets.
SPACs also face several challenges. According to experts, SPACs have distinct trading cycles, unlike an IPO. They also need to deal with uncertainty risks like divergent interests of sponsors, investors and the target company.
In the Indian context, some of the challenges are that merger through a scheme of arrangement could be time-consuming. Similarly, the process of liquidation could take considerable time, which might reduce the attractiveness of SPAC over IPO.
There are regulatory concerns and issues as well in the SPAC proposal. “As per the Companies Act, 2013, a company is required to commence
business within one year of incorporation. This may not suit a SPAC which may not have business for nearly two years.
Other regulatory concerns could be the stage at which retail participation should be allowed. Sebi regulations also would need amendment to allow listing of a SPAC which could initially be a non-operating company.
The other concern is regarding the change in control post amalgamation, which again might require amendments to takeover regulations.