SEBI proposes simpler rules for startup listings

Securities and Exchange Board of India (SEBI) appointed expert committee has proposed changes to the regulatory framework to facilitate the listing of startups and firms with low promoter holdings.

The committee, named 'Expert Committee for Facilitating Ease of Doing Business and Harmonisation of the Provisions of ICDR and LODR Regulations,' has identified a challenge faced by entrepreneurs who, after multiple rounds of fundraising, often hold less than the required 20 per cent for launching an initial public offering (IPO).

The current regulatory framework, specifically Regulation 14 of the SEBI (Issue of Capital and Disclosure Requirements) Regulations, mandates a minimum promoter contribution of 20 per cent of the post-offer paid-up equity share capital.

To address this issue, the committee recommends that non-individual shareholders holding five percent or more of the post-offer equity share capital be allowed to contribute to the shortfall in minimum promoters' contribution, up to a maximum of 10 per cent, without being classified as promoters.

Additionally, the committee suggests that equity shares resulting from the conversion of fully paid-up, compulsorily convertible securities held for at least one year prior to filing the Draft Red Herring Prospectus (DRHP) should be considered eligible for minimum promoters' contribution.

The committee, chaired by S K Mohanty, a former whole-time member of SEBI, stressed upon the rationale behind this recommendation, stating that the capital represented by the convertible securities has been in existence and held for at least one year before the DRHP filing. The conversion of compulsorily convertible securities into equity shares should occur before the submission of the red herring prospectus.

In addition to addressing promoter holding issues, the committee provides recommendations on various matters, including the filling of key management personnel vacancies, timelines for prior intimation of board meetings, and the application of SEBI (Listing Obligations and Disclosure Requirements) Regulations based on market capitalisation, among other considerations.

SEBI has invited public comments on these recommendations, with the deadline for submission set for February 1.