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 and 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 advise on ensuring that market disruption does not come at the cost of investor protection and market integrity.
Incidentally, 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 recognised stock exchanges raising a red flag over the mushrooming of such ventures.
Crowd-funding
The Committee on Financial and Regulatory Technologies will, among other things, deliberate on financial technology solutions for “further widening and deepening of the Indian securities market” through traditional and alternative platforms, including peer to peer lending and equity crowd-funding.
Interestingly, this comes in the wake of notices that the regulator has sent to many entities that act as platforms for funding start-ups or connecting them to the large investor community.
While questioning the manner in which these entities help start-ups raise funds, the regulator has said that any violation would be “construed as organising an unrecognised stock exchange” and that SEBI would be “constrained to initiate action.”
There are many entities such as Grex, Venture Catalysts, Indian Angel Network, LetsVenture, Traxn and TermSheet that help start-ups connect with investors. It could not be immediately ascertained whether all these entities have received the SEBI notice.
Under the current 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. Industry participants said that SEBI has a provision under Section 28 of Securities Contracts (Regulation) Act (SCRA) that allowed the regulator to recognise such alternative investment platforms.
‘Framework critical’
“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,” said Sumit Agrawal, partner, Suvan Law Advisors and a former SEBI law officer.
“A SEBI press release issued last year looks at all such innovations with a suspicious eye. Globally there are no uniform standards for registrations while at most places such platforms are regulated trading venues, which serve as an alternative to trading at a public exchange,” he added.
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.
Manish Kumar, group CEO of iVentures and Co-founder Grex, is of the view that while angel groups are an important part of the ecosystem, even stock exchanges could look at such alternative platforms as a means to “deeper downstream integration.”
“I think it is a welcome step towards a more structured environment. We at Grex have been engaged with the regulator and consistently professed structured market and compliance with norms… I think SEBI has taken a sure-fire positive step towards a better equity market system,” he added.