Relief for startupreneurs soon? SEBI suggests changes to LODR, ICDS regulations

The provisions of LODR Regulations are applicable even if the ranking of a company falls with a drop in its market capitalisation. The committee has suggested that this be changed.

In what could come as a relief to many startupreneurs, the market regulator has suggested providing more flexibility when meeting the minimum promoters' contribution (MPC) at the time of a public issue.

At a public issue, promoters are expected to hold a minimum of 20 percent of the post-issue capital. This is particularly hard on startupreneurs who have their shareholding diluted over the years with different rounds of funding.

Besides the MPC recommendations, the consultation paper released by the Securities and Exchange Board of India (Sebi) has also suggested easing the listing regulations such as making the applicability of these regulations more dynamic.

The paper has an expert committee's suggestions for ease of doing business and for the harmonisation of Sebi (Listing Obligations and Disclosure Requirements) Regulations (LODR Regulations) and of Sebi (Issue of Capital and Disclosure Requirements) Regulations (ICDR Regulations).

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Listing Regulations

LODR Regulations, which become applicable on the basis of market capitalization, continue to remain applicable forever even if the market capitalisation of the entity falls and the entity moves out of top 100/250/1000/2000 ranking, said the consultation paper. The committee has suggested that a sunset clause be added, so that if the ranking of the entity changes for three consecutive years, then the regulatory provisions should cease to be applicable for the listed entity.

However, if the ranking of the entity changes in subsequent years (after sunset clause sets in) and the listed entity once again enters into the top market-cap list, then it has to comply with the provisions again, the committee has suggested.

Another significant suggestion is about prior intimation of board meetings submitted to stock exchanges. The paper suggests that prior intimation be given only for fund-raising proposals that involve issue of securities and for determination of issue price. It has suggested the prior intimation be done away with, when the board meeting is to determine issue price for fundraising through qualified institutions placement in compliance with the ICDR Regulations.

The other suggestions are on the limits placed on the number of committees independent directors can be part of, increasing the time limit for getting regulatory clearances for appointment of key management personnel and making the timeline for giving prior intimation on board meetings uniform.

At present, the timeline for giving an intimation on board meetings varies between two working days to 11 working days.

Public Issue

In ICDR Regulations, the committee has suggested revisions to make it easier for companies who are coming out with a public issue to meet minimum promoters' contribution.

This would be particularly useful for a growing startup economy.

As the paper stated, "Companies promoted by entrepreneurs often have several rounds of funding prior to listing of their equity shares on the stock exchanges. In such situations, the promoters’ holding may fall short of the minimum promoter contribution i.e., 20% of the post-offer equity share capital. While the ICDR permits certain categories of investors to contribute equity shares held by them towards the shortfall, further flexibility could be provided."

It added,"Non-individual shareholder that would hold 5% or more of the post-offer equity share capital may be permitted to contribute towards the shortfall in MPC, subject to the existing maximum of 10%, without being identified as a promoter".

To meet the MPC requirement, the regulator has also suggested including the equity shares received on conversion of fully paid-up compulsory convertible securities including depository receipts held for more than one year.

As of now, such equity shares are ineligible when converted in the last one year prior to the Draft Red Herring Prospectus (DRHP).

"The suggestion is based on the rationale that the capital (i.e., the convertible securities) had been in existence and held for a period of at least one year prior to the filing of the DRHP," said the consultation paper.

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"With same rationale as above, already in terms of Regulation 8 of the ICDR, it is permitted to do an offer for sale (OFS) of equity shares arising out of the conversion of fully paid-up compulsorily convertible securities including depository receipts that have been held for a period of at least one year prior to the filing of the DRHP. Therefore, equity shares received upon conversion of such instruments held for a period of more than 1 year may be counted towards minimum promoters’ contribution. The compulsorily convertible securities should be converted into equity shares prior to the filing of the red herring prospectus," it added.