LISTING WITHOUT AN IPO FOR SME: ALTERNATIVE EXIT ROUTE FOR INVESTORS

Recently, SEBI vide its Circular dated October 24, 2013 (“Circular”), allowed listing of specified securities of small and medium enterprises (“SME”) which do not have their securities listed on any recognized stock exchange,  exclusively on the institutional trading platform (“ITP”), without an Initial Public Offer (“IPO”).

This move will facilitate the early stage companies to raise further capital from the securities market, without satisfying much stringent eligibility criteria of an IPO. It will serve as an alternate and easy exit mechanism for most of the investors like angel investors, venture capital funds (“VCFs”) and private equities (“PEs”) from such companies as company would fetch better valuation and easy price discovery mechanism would enable liquidity for the shares of such companies.

The legal framework for such listing and trading of the specified securities on the ITP has been laid down vide the SEBI (Listing of Specified Securities on Institutional Trading Platform) Regulations, 2013 dated October 08, 2013 (“ITP Regulations”) and necessary amendments have been made in to incorporate the said change.

The key features of the ITP Regulations and the Circular are as follows:

A.    Applicability

1)     These regulations shall apply to SME’s which do not have their securities listed on any recognized stock exchange and which seek listing of their specified securities exclusively on the ITP.

2)    SME shall be a public company including start-up companies, that complies with all the eligibility conditions listed in the ITP Regulations.

A1Institutional Trading Platform (ITP)

1)    ITP shall be a platform for listing and trading of specified securities of SME.

2)    The ITP shall be accessible only to informed investors who are either individuals or institutions and the minimum trading lot shall be ten lakh rupees on this platform;

3)    Companies listed on ITP shall not make a public issue of its securities.

B.    Eligibility to be listed

A public company seeking listing on the ITP should comply with the following requirements:

  1. The said company, its promoter, directors and group company shall not appear in the willful defaulters list of Reserve Bank of India (“RBI”).
  2. No winding up petition against the company should have been admitted by a competent court.
  3. The company, group companies or subsidiaries should have not been referred to the Board for Industrial and Financial Reconstruction within a period of 5 (five) years prior to the date of application for listing.
  4. No regulatory action should have been taken against the company, its promoter or director by SEBI, RBI, Insurance Regulatory and Development Authority or Ministry of Corporate Affairs within a period of 5 (five) years prior to the date of application for listing.
  5. Company should have at least 1 (one) full year’s audited financial statements, for the immediately preceding financial year and has not completed a period of more than 10 (ten) years after incorporation and its revenues have not exceeded Rs. 1,00,00,00,000 (Rupees One Hundred Crore only) for any financial year.
  6. The paid-up capital of the company should not have exceeded Rs. 25,00,00,000 (Rupees Twenty Five Crore only).
  7. In addition to the above requirements, the company should have received minimum investment from at least any one of the following categories of investors:
Sr. No. Investor Details of Investment
1 At least one AIF, VCFs or other category of investors/lenders approved by SEBI Minimum amount of INR 50 Lakhs.
2 One or more angel investor who is a member of an association / group of angel investors Minimum amount of INR 50 Lakhs, through the association/group, not individually.
3 Finance from a scheduled bank Minimum 3 years elapsed and funds are exhausted
4 Merchant Banker or Qualified Institutional Buyer. Minimum amount of INR 50 Lakhs and lock-in for a period of 3 years from listing.

Further, investment from international multilateral agency or domestic agency or a public financial institution has also been recognized for the purpose of eligibility.

 C.    Raising of capital

  1. A company listed on ITP shall not make an IPO while being listed on the platform.
  2. The company can raise the capital only through rights issue or through private placement.
  3. In case of rights issue there shall be no option for renunciation of rights and the company shall agree to make necessary amendments to Articles of Association to this effect.
  4. In case of private placement, the company should obtain in-principle approval of the recognized stock exchange prior to allotment, obtain shareholders’ approval under section 81(1A) of the Companies Act, 1956, complete allotment within 2 (two) months of such approval, disclosures to be made in explanatory statement to the notice to shareholders and follow pricing norms as elaborated in Chapter XC of ICDR Regulations.

D.    Minimum promoter shareholding and lock-in

Not less than 20% (twenty percent) of the post listing capital of the company shall be held by the promoters at the time of listing and the same shall be locked-in for a period of 3 (three) years from date of listing.

E.    Exit from Platform

  1. Voluntarily: A company listed on ITP may exit the platform voluntarily after obtaining approval of its shareholders as below: if shareholders approve such exit by passing a special resolution through postal ballot where 90% (ninety percent) of total votes and the majority of non-promoter votes have been cast in favor of such proposal and it shall also obtain the SME Exchange’s approval.
  2. The company would be required to exit the platform within 18 (eighteen) months from any of the following events:

a)    being listed on ITP for 10 (ten) years;

b)    having paid up capital of more than Rs. 25,00,00,000 (Rupees Twenty Five Crore only);

c)    having revenue of more than Rs. 3,00,00,00,000 (Rupees Three Hundred Crore only) in the last audited financial statement; or

d)    having market capitalization of more than Rs. 5,00,00,00,000 (Rupees Five Hundred Crore only). (The market capitalization shall be calculated based on the average closing price of the shares for the previous 3 (three) months.)

3. A company listed on ITP shall be delisted and permanently removed when it fails to file periodic filings with the recognized stock exchange, or fails to comply with provisions regarding corporate governance for more than one year or fails to comply any condition as specified by the recognized stock exchange.

4. In case of a company delisted under point (3) above, no company promoted by promoters and directors of such delisted company shall be permitted to be listed on ITP for a period of five years from the date of such delisting:

F.    Liabilities

  1. The draft and final information memorandum shall be approved by the board of directors of the company and shall be signed by all directors or any other person heading the finance function and discharging that function and certify that the disclosures made are true and correct. The signatories shall further certify that all disclosures made in the information document are true and correct.
  2. In the event of mis-statement in the information document or any omission therein, any person who has authorized the issue of information document shall be liable in accordance with the provisions of the SEBI Act, 1992 and regulations made there under.

Disclaimer: This is not a legal opinion and should not be construed as one.  Please speak with your attorney for any advice.

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