Reforming SEBI rules for India’s new-age tech IPOs

SEBI enforces stringent compliance through mechanisms such as mandated fund monitoring for IPO proceeds exceeding ₹100 crores.

By Manshoor Nazki and Vartika Jain 

2024 was a banner year for Indian IPOs by new-age tech companies (NATCs), with 13 NATCs collectively raising over Rs 29,000 crores. With 2025 poised for similar momentum, these companies face a critical challenge—how to utilise public funds to meet their unique business needs. The relevant SEBI regulations, rooted in traditional business models, necessitate amendments to address the evolving requirements of NATCs.

Regulatory Framework and Challenges

The SEBI Issue of Capital and Disclosure Requirements (ICDR) Regulations, 2018, evolved from its predecessor of 2009 and earlier guidelines from the 1990s. These regulations were designed with manufacturing and service-oriented companies in mind, focusing on tangible assets such as land, property, and equipment. However, NATCs operate with asset-light models, relying heavily on intellectual property, technological infrastructure, and human capital. With growth sponsored by private equity funding and business models based on intangibles such as accessible market, eyeballs, customer acquisition and retention, the key expenditure categories and performance indicators of NATCs is vastly different.

SEBI enforces stringent compliance through mechanisms such as mandated fund monitoring for IPO proceeds exceeding ₹100 crores. While effective for traditional businesses, these measures fail to accommodate the innovative and flexible business strategies of NATCs, leading to mismatched regulatory expectations.

New-Age IPO Objects

A close examination of use of IPO funds by NATCs reveals a paradigm shift when compared to traditional businesses. While traditional brick-and-mortar companies raised IPO capital mainly for well-recognised items such as debt repayment or capital expenditure, a notable trend among NATCs has been to earmark a majority portion of the IPO capital toward intangible assets, including:
• Investment in Technology: A significant portion of funds is directed toward research, product development, and technological upgrades essential for maintaining competitive relevance.
• Market Expansion: Proceeds are often earmarked for marketing, customer acquisition, and strategic partnerships, including ‘blind-pool’ acquisitions capped at 35% under current regulations.
• Operational Expansion: Companies aim to diversify into complementary segments for a self-sustaining ecosystem.
• Stakeholder Engagement: Incentive schemes, loyalty rewards, and referral benefits are leveraged to enhance customer and merchant engagement.
• Human Capital: Skilled personnel, as the core assets of NATCs, demand investment in talent acquisition and retention and employee benefits.
• Infrastructure Development: Transitioning operations to cloud-based systems, data centres, and advanced analytics solutions often necessitates significant funds.

Need for Regulatory Reform

Indian government has demonstrated support for innovation-driven enterprises, but the current SEBI expectation on use of proceeds is characterised by watertight disclosures backed by external certifications and documents as well as demonstrating historic expenditure. Amending the framework to allow greater flexibility on use of proceeds for NATCs would align India’s practices with global standards and foster growth.

A cross-jurisdictional analysis reveals an interesting divergence in disclosure requirements for use of IPO proceeds. Countries like the United States, the United Kingdom, and Singapore adopt principles-based frameworks, enabling companies to outline broad uses for funds in alignment with evolving business needs without having to continuously amend the IPO disclosure regime as new issues arise. This approach ties the use of proceeds to the overall financial condition and business strategy of issuers through narrative discussions encouraging analysis of capital expenditures and liquidity trends in the offer documents. Consequently, IPO-bound companies enjoy considerable freedom in these jurisdictions in how they disclose the intended use of proceeds.

Key Areas of Reform

To adapt SEBI regulations for NATCs, several changes are essential:
# Recognition of Intangible Assets: SEBI should introduce guidance accommodating expenditures on human capital, research, and intellectual property creation.
# Relaxation of Historic Cost Justifications: Regulations should reduce emphasis on prior expenditures and focus on forward-looking strategies.
# Streamlined Use of Proceeds Disclosures: Simplifying compliance for use of proceeds disclosures would enable quicker NATC listings.

Conclusion

India stands at a pivotal moment in capital market evolution with NATCs driving innovation and growth. These businesses need to be afforded adequate independence to pioneer innovation. SEBI’s stringent IPO framework demands detailed use of proceeds disclosures and tangible project expenses, imposing significant compliance burdens. By adopting principles-based disclosure regimes similar to developed markets, SEBI can create a conducive environment for NATCs to thrive.

Flexible regulations tailored to the needs of technology-driven enterprises would not only pave the way for smoother IPO processes but also reinforce investor confidence in Indian capital markets. With transformative policy changes, SEBI can position India as a global hub for innovation-oriented NATC listings, ensuring the growth of the next wave of technology leaders.

(Manshoor Nazki, Partner (Regional Co-Head - Capital Markets - South) and Vartika Jain, Partner, Cyril Amarchand Mangaldas.) 

Views are personal, and do not represent the stand of this publication.