Higher disposable income brings with it a big bag of worries. The challenge lies in channelising it in the best way so that money grows, allowing you to enjoy those Caribbean holidays in your sunset years and to ensure that your children have enough money to follow their dreams.

Well, the obvious choices are bank deposits, equity, bonds, mutual funds, debentures, real estate and gold. But if you are the adventurous kind, you might fill your spare room with paintings, sculptures and other works of unknown artists or invest in wine, whisky and the like that are expected to turn into a gold mine after many years. Even if the investment becomes worthless, you don’t lose much since you can always drink those wines or gift the paintings to an annoying relative.

Besides these well-trodden paths for investments, many ultra rich are now turning their attention to the unicorns grazing in the start-up space. For the uninitiated, a unicorn is a start-up whose valuation has exceeded $1 billion.

With increasing hype surrounding start-up companies, especially in the tech space, many want to begin investing some of their surplus savings in these companies so that they too can own a share of a Twitter or an Alibaba in-the-making.

You can do this indirectly through angel or venture capital funds or directly in a company your friend has launched. But a better route to direct investment in start-up companies is through the Institutional Trading Platform (ITP) that is soon to be launched by the country’s exchanges.

Market watchdog SEBI has rolled out the rules governing these platforms and the first issue will soon hit the market.

How the regulations read Many start-ups are reported to have approached SEBI, requesting the regulator to waive some of the requirements that need to be met by companies approaching the primary market on the main platform.

The stringent requirements had resulted in these companies seeking listing on overseas exchanges. The rules for the ITP have therefore been framed to balance the funding requirements of the start-ups with the need to protect investors from burning their fingers.

These companies have been given many relaxations compared to companies seeking listing on the main platform. But the regulator has also put in numerous safeguards to protect investors. Let’s start with the relaxations. The companies proposing to list on the ITP need not spell how the issue proceeds will be utilised. There is no limit on the proportion that will be used for expenditure classified as ‘for general corporate purposes’. This means that these companies can get away by not disclosing the purpose for which they are raising the funds — whether it is to expand capacity, repay debt or for an office party.

The safeguards The need to lock-in promoters’ holdings for three years is also done away with for these issues. The entire pre-issue capital in these issues will be uniformly locked in for a period of just six months from the date of allotment. Needless to say, these clauses increase the risks associated with these issues.

The regulator has tried to protect investors in these issues by ensuring that large institutional investors hold a substantial stake in these companies.

These large institutions can make sure that timely disclosures are made and corporate governance is good.

Start-up companies that have businesses oriented towards information technology, intellectual property, data analytics and nano technology are mandated to have Qualified Institutional Buyers (QIBs) holding at least 25 per cent of their pre-issue capital. Companies from other sectors need to show QIBs holdings of at least 50 per cent.

QIBs can be public financial institutions, scheduled commercial banks, mutual funds, FIIs, venture capital funds, insurance companies, provident and pension funds.

The promoter holding is restricted to 25 per cent of the post-issue capital. This is to ensure adequate public float in the company. The regulator has laid down that only QIBs and Non-Institutional Investors (NIIs) are allowed to invest in the issue. NIIs are investors other than QIBs and retail investors.

An attempt has also been made to ward off retail investors by stipulating a minimum application amount of ₹10 lakh. The trading lot size of these companies will be ₹10 lakh.

The catch The moot point is whether it is a good idea to close the doors for small investors. For retail investors who wish to invest in start-ups, ITP is a good channel.

Presence of QIBs as investors in these offers makes these companies safer. Stating that it is risky for small investors and hence raising the investment limit to prohibitive levels is akin to taking away their right to decide on where they wish to invest.

Second, by keeping out small investors, the regulator has drained away liquidity from this platform. The minimum number of investors for these issues is 200. It is doubtful if any buyer or seller will be able to find a counter-party when he wants to transact. Exchanges may have to introduce market-makers to make this workable. Hourly call auctions are also likely to be introduced, similar to the SME platform, as bunching of transactions every hour will make execution easier.

In the absence of volume, the platform will be unable to attract the larger and more popular start-ups, such as Flipkart.

But these are early days. Further modifications to the rules could be made after the platform starts operations to attract more companies and investors.

Meanwhile, the ITP could be used by smaller start-up companies to raise money and help their VC investors exit. Those looking for interesting ideas to invest in, and are game for some risk, can watch out for issues on this platform.

Related Topics