In the past few decades, startups have received proliferating attention globally. Today, startups are identified as vital engines for economic growth and job genesis. They transform the market with their high tech and dynamic solutions and with the support of a strong and nurturing ecosystem, they aspire to metamorphose into leading global businesses.
In India, the number of startups has increased velociously. With the support of the government and due to the colossal commercial potential for startups, India has moved up to the third position on the global list. Initiatives, projects and government missions such as ‘Startup India’, ‘Digital India’ and ‘Vocal for Local’ have provided a nurturing grass root level support to the startups in their initial development years.
Few such initiatives taken by the Indian government recently to boost the Indian startups are mentioned hereunder:
Startup India Seed Fund Scheme (‘SISFS’)
- The Union Budget 2021 was launched with a focus on reviving healthcare, education, fintech, infrastructure and other sectors, impacted by the global pandemic, Covid-19.
- For the efficacious fulfillment of the same, Indian government has sanctioned the sector-agnostic SISFS for providing financial assistance to startups via corpus of INR 945 Crore to be disbursed through selected incubators across India from the year 2021 to 2025.
- A startup, recognized by the Department for Promotion of Industry and Internal Trade, incorporated not more than 2 years ago at the time of application under SISFS, is eligible to avail benefit of SISFS.
- SISFS is expected to elevate startups by providing them adequate funds to meet their capital requirement via
Listing norms for startups
- The global startups have been accessing both national and international markets to raise capital. In India, typically, main sources for the same were venture capital and the private equity route.
- The Securities Exchange Board of India, being conscious of the lack of avenues available for sourcing capital, introduced Institutional Trading Platform (‘IIT’) and renamed it as Innovators Growth Platform (‘IGP’). Introduced under the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018, the IGP will extend the deserved support to the new-age national startups to access the capital markets.
- Further, on 14 December 2020, SEBI issued a consultation paper reviewing the IGP framework and made some key recommendations, which include:
- Eligibility criteria:
SEBI earlier reduced the requirement of pre-issue capital to be held by eligible investors from 50% to 25% for a period of minimum 2 years in 2019. Now, SEBI has proposed to reduce the period of aforementioned holding from 2 years to 1 year. This will help the startups in attracting investors who are inclined for an early listing at the time of investing in startups.
- Differential Voting Rights (DVR) / Superior Voting Right (SR) equity shares:
Companies listed under IGP may be allowed to issue differential voting right or superior voting right equity shares to the founder and promoters, as allowed for companies listed on Main Board[1]
- Takeover requirements:
SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 2011 stipulates a 25% threshold for triggering an open offer. Since, life cycle of start-up companies eventually lead them to get merged or acquired by a larger company, stringent takeover requirements, may become a roadblock in such scenarios. Thus, the threshold trigger for open offer is proposed to be relaxed from 25% to 50%.
- Migration to Main Board:
IGP company shall be eligible to trade on the main board of the stock exchange provided it fulfills certain conditions.
In this regard, SEBI has proposed to reduce one such eligibility requirement of capital to be held by Qualified Institutional Buyers from 75% to 40% in order to apply for migration to the main board by startups.
Corporate restructuring of startups:
- The Ministry of Corporate Affairs notified the Companies (Compromises, Arrangements and Amalgamations) Amendment Rules, 2021 pursuant to which the benefits pertaining to fast track merger can now be availed by:
- two or more startup companies; or
- one or more startup companies with one or more small companies.
- This amendment has simplified the restructuring avenue for startups by approaching the concerned Regional Director instead of the National Company Law Tribunal.
- Further, the new-age startups are a step closer to exploring the option of swiftly multiplying its resources by joining hands with another startup or small company and advance innovation driven businesses. In this regard, it may also be noted that the thresholds for qualifying as a small company has also been increased which is also a welcome change.
Conclusion
Majority of startups are developing next generation technological solutions including artificial intelligence, internet of things and blockchains. However, owing to current pandemic, the pace of funding activities has been reduced. National and international investors are themselves facing Covid-19 induced economic slowdown. This is deterring the startups to foster and flourish their innovative brain-child.
Getting past the prevailing economic crisis is the compelling need of the hour and the initiatives taken by Indian Government for startups enunciate a two-fold benefit i.e., (i) accelerating the Indian economy by fueling business of fresh entrepreneurs; and (ii) assisting the startups to survive the present difficult times and thrive in future.
[The authors are Executive Partner and Associate, respectively, in the Corporate and M&A practice at Lakshmikumaran & Sridharan Attorneys, New Delhi]
[1] Main board means a recognized stock exchange having nationwide trading terminals, other than SME exchange.
