SEBI plays angel to start-ups, eases investment norms

Let a million start-ups bloom. India’s financial regulator Securities & Exchange Board of India’s new investment norms are set to provide a big boost to start-ups in India. In an important initiative, the SEBI has eased rules for initial share sales by startups to encourage them to raise money on India’s stock exchange rather than looking abroad. This move is aimed at encouraging India’s booming startup industry, which ranks fifth in the world at the moment, to prefer the local Indian market. However, SEBI hasn’t fixed a date for the new rules to be implemented.

SEBI Chairman U. K. Sinha said that there were more than 3,100 startups functioning in India. The latest move would let unprofitable new firms sell shares to the public, something not previously allowed, and shorten the time investors are required to hold shares after an IPO.

“Many startups have considered listing outside India because they felt the regulatory regime in this country was not favorable for them,” he added.

Under the new rules, technology startups – companies that are intensive in their use of technology, information technology, intellectual property, data analytics, biotechnology, and nanotechnology to provide products and services – will need to sell only 25% of shares to institutional investors, and the rest can be sold to individuals. Earlier, they had to sell 75% of their shares in IPOs to institutions.

Until now raising public capital meant listing of the businesses in the U.S. or Singapore, because India’s strict laws made it impossible for unprofitable companies to sell shares to the public. But there is a high possibility that Indian startups continue to prefer listing in the US, as investors in there appreciate the growth prospects of online businesses and are less concerned about its current profitability. Indian investors are majorly concerned about profitability and a company’s ability to pay dividends.

Considering the number of startups and Internet-enabled companies India has, the alternative listing platform seems to be a significant step, as it will enable these companies to raise capital and list in India. The country is witnessing a boom in its technological market, and the relaxation given by SEBI will further ease the process and bring in high-quality investors.

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