The Securities and Exchange Board of India (Sebi) has proposed a new set of rules to enable India’s growing number of start-ups to raise capital more easily on an alternative platform in the local stock exchanges. The proposed rules, which form part of a discussion paper released by the regulator on Monday, signal a shift in policy perception relating to new-age firms, which, unlike the traditional brick-and-mortar firms, have innovative business models but burn cash in the initial phase of growth and need experienced investors to buy into their stories. Sebi as well as the government — which announced Rs 1,000 crore for start-ups in this year’s budget — appear to have recognised their growth potential and ability to create new jobs.
Sebi now wants to smoothe the path for capital raising for new-age companies with differential rules on disclosure, listing and other provisions in line with standards prevailing in other global jurisdictions. The aim is to create a new platform for these firms to raise funds from mainly institutional and high net worth investors. Many start-ups prefer to either raise funding overseas or list in exchanges abroad. The company that is the poster boy for e-commerce in India, Flipkart, is a classic example of a start-up flourishing because of funding from global investors and a poor testimony to an eco-system within the country that is unable to back young entrepreneurs with bright ideas.
For this to work, however, the regulator and stock exchanges will have to address a few things. For one, they need to be watchful about the first lot of firms that are allowed to list on this new platform. With easier rules and flexibility, the risk of reputational damage in case some of the early birds fail may be high, which could potentially stunt the growth of this fund-raising platform in the medium term. And there have been enough instances in the past of policymakers back-pedalling after easing rules, in the face of unscrupulous promoters taking advantage of regulations. The other challenge would be to attract good quality firms to list first on this platform and then allow them to migrate to the main board of stock exchanges. Perhaps Sebi is caught in a conflict between protecting retail investors in India and simplifying rules and developing the market. What it should really be bothered about is the amount of disclosure and transparency on offer, leaving it then to investors to make their choices.