The Securities and Exchange Board of India (SEBI) is concerned with the manner in which start-ups are being funded through unregulated entities and is examining the manner in which alternative fund-raising platforms are crowd-funding ventures can be regulated to bring in transparency and regulatory oversight in such deals.
- The regulator has recently formed a panel under T.V. Mohandas Pai, former CFO of Infosys, to look into this issue and advice on ensuring that market disruption does not come at the cost of investor protection and market integrity.
- The SEBI chairman Ajay Tyagi had recently met an industry delegation to discuss the matter as the regulator was concerned with the increasing number of such entities in the market with even recognized stock exchanges raising a red flag over the mushrooming of such ventures.
Various mandates of the panel:
- To ensure that market disruption does not come at the cost of investor protection and market integrity
- The Committee on Financial and Regulatory Technologies will deliberate on financial technology solutions for widening and deepening of the Indian securities market through traditional and alternative platforms, including peer to peer lending and equity crowd-funding
Present legal framework:
- Under the present legal framework, issue of shares to more than 200 persons constitutes a public issue and needs SEBI approval
- Earlier, the cap was 49 and was increased to 200 when the Companies Act was revised in 2013
- The cap was increased to 200 from 49 when the Companies Act was revised in 2013
- SEBI has a provision under Section 28 of Securities Contracts (Regulation) Act (SCRA) that allowed the regulator to recognise such alternative investment platforms.
- There are many entities such as Grex, Venture Catalysts, Indian Angel Network, Lets Venture, Traxn and Term Sheet that help start-ups connect with investors.
- Globally there are no uniform standards for registration of such investment platforms, at most places such platforms are regulated trading venues, which serve as an alternative to trading at public exchanges
- The regulator was concerned with the increasing number of such entities in the market
- The regulator has even sent notices to many entities that act as platforms for funding start-ups or connecting them to the large investor community
- The regulator has questioned the manner in which these entities help start-ups raise funds. Any violation would amount to organizing an unrecognized stock exchange and SEBI would be constrained to initiate action.
- While a notification under section 28 of SCRA providing legal recognition to alternative investment platforms would be a welcome step, a lot would depend upon the framework to ensure clearing and settlement and audit trail of transactions.
- The start-up ecosystem has gained significance especially after the government’s Make in India initiative and important departments including the Department of Economic Affairs and Department of Industrial Policy and Promotion are pushing regulatory bodies to create an investor-friendly ecosystem for such ventures.