The start-up segment in India is all charged up after the mega Walmart-Flipkart deal, and 2018 ended as one of the best years in recent times for investments in start-ups. It is clear that there is no dearth of innovative ideas in the country, and there are investors who are willing to back them.

It is, therefore, not surprising that the Indian capital market regulator, the Securities and Exchange Board of India, is trying to do its bit in giving a leg-up to this bustling space. The Institutional Trading Platform (ITP), started in 2013, now renamed Innovators Growth Platform (IGP), is one such effort.

The IGP helps investors in start-ups divest their holdings without making a public offer. Profitability and other disclosure requirements are less stringent here, compared to the SME platform or the main board of exchanges.

But in the five years since its launch, only a handful of companies have listed on the ITP of both the BSE and the NSE.

The primary factor hampering growth of this platform appears to be its narrow mandate. While the Indian regulator has shown salutary initiative in launching the IGP, the vision for this platform can be much broader than it is now. If the IGP has to really become more useful for start-ups, the regulation needs to look beyond the listing stage and also focus on creating interest in these securities post-listing. Improved liquidity in companies already listed on the platform can help new entrants find buyers as well.

The platform can also help retail investors with capacity to take risk, to find investment opportunity in the start-up space.

What’s new

Following a review in 2018, the rules governing ITP were tweaked in December. In its new avatar as the Innovators Growth Platform, the participant base has been considerably widened and some of the difficulties being faced by companies have been ironed out.

The ITP was launched with the sole intention of providing exits to Qualified Institutional Borrowers (QIBs) such as angel investors and venture capital funds. Only those technology or innovation-driven start-ups in which QIBs held at least 25 per cent stake when the draft document was filed with SEBI could earlier use the ITP. In other start-ups, 50 per cent stake had to be held by QIBs.

The regulator is now conceding that start-ups can be funded by other investors too besides QIBs such as family trusts with net worth of more than ₹500 crore and pooled investment funds with minimum assets under management of $150 million regulated in the country of their residence.

Interestingly, the regulator is also willing to accept start-ups funded by individuals or other companies. Therefore, a new category of pre-listing investor — accredited investors — has now been introduced. This category includes individuals with annual income of ₹50 lakh with minimum liquid net worth of ₹5 crore or a company with net worth of ₹25 crore.

SEBI has now laid down that exiting investors should have held stake in the company for two years prior to the listing. This ensures that investors do not use the IGP platform to make quick exits from their investments.

The ICDR (issue of capital and disclosure requirements) regulations laid down that no person, individually or collectively, could hold more than 25 per cent of the post-issue capital. This cap has now been removed paving the way for higher stakes to be held by individuals.

Funding growth

The above changes are welcome, but the regulator can also envisage a broader role for the IGP. Let’s begin with the start-up companies. Besides providing exit to existing investors, the IGP can become an avenue for funding future growth of start-ups. If a robust ecosystem is created on the IGP where investors of all hues — foreign, domestic, retail, HNI and institutions — participate actively, this investor base can be tapped on a regular basis by start-ups through public issues.

Besides providing greater visibility, it will lower their dependence on PEs and VCs. SEBI, however, needs to relax its rules that start-ups listed on this platform cannot make initial public offering.

These companies are currently allowed to raise capital through private placement or rights issue without an option for renunciation of rights.

Investments for retail

The other important role that can be served by the IGP is to showcase eligible start-ups in which investors can park some money. Purchasing stakes in new businesses through an exchange platform may be a better alternative compared to buying through other avenues, as basic information is made available on the exchange website and periodic disclosures are mandatory.

In this regard, the recent move to reduce the trading and application size on the IGP to ₹2 lakh, down from ₹10 lakh earlier, can turn out to be a game-changer. Some care, however, needs to be taken to protect the more vulnerable investors from this platform.

Since many of these start-ups are yet to break even or turn profitable, they do carry greater risk. It might therefore be better to apply the criteria applicable to individual accredited investor (individuals with annual income of ₹50 lakh with minimum liquid net worth of ₹5 crore) to retail investors buying shares on the IGP.

Reducing the trading lot size to ₹2 lakh is likely to result in an improvement in turnover on this platform; it is currently negligible. Besides this, the regulator can consider introducing market makers on the IGP as well. This can have a cascading effect on boosting the growth of this platform. Currently, it is highly likely that absence of sellers will thwart those wishing to buy a security on the IGP. This is likely to keep investors away, affecting the secondary market for these securities.

But ensuring an active secondary market might help initial listing of other entities on the IGP, since investors in the secondary market will be actively looking for new listings as well.

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