SEBI dismisses the SVR share ownership through trusts. Stricter IPO norms for start-ups for 2021

 

The securities and commodity market regulator, Securities and Exchange Board (SEBI), has denied the demand of many Indian start-ups to allow the founders to retain the special voting rights (SVR) shares through trusts. As of now, only the full-time executives of the company can own SVR shares directly. 

However, companies have identified a loophole where SEBI allows the company’s ownership via trusts, and start-ups can also save tax. Moreover, trusts are also used by several companies for creating opaque shareholding structures. SVR shareholders have greater voting rights than the shareholders of average equity. Thus, the founders of the start-ups retain their control in the company using SVR.

SEBI states that SVR shares are not meant for other persons apart from the founder of the company. But if a company is owned through a family trust, there can be other company beneficiaries related to the founder. As Primary Market Advisory Committee (PMAC) recommended, the existing provision of issuing SVR shares only to the founders should be retained. 

However, it is a common practice where promoters/founders’ shares of the company through trusts. This practice has several benefits like it helps in tax savings, easy succession planning and makes the ownership structure look more appealing. According to the tax experts, tax rates can be lowered by 10 per cent approximately if the shares of the company are owned via trusts.

Further, it has an additional benefit. For example, if the shareholder meets with any uncertain event, the family members of the shareholder can claim the ownership of the shares. However, SVR shares have their limitations, as superior voting rights are valid only for five years. In case if the company gets listed, then the shareholder can ask for approval to continue SVR for another five years. Thus, the SVR shares can be maximum owned for ten years, and after this time period, they get converted into regular equity shares.

 

Additionally, SEBI suggests amending other rules of initial public offerings (IPOs) so that the companies/start-ups’ workings are more transparent. SEBI is planning to strict the regulations since the IPOs of the start-ups is surging.

SEBI has decided to set an upper limit on the amount, which can be raised by the companies, especially start-ups through IPO for inorganic growth perspectives or the stake which existing shareholders can offload through IPO. 

Additionally, for the anchor investors, SEBI has planned to expand the lock-in period from 30 days to 90 days so that the regulator can monitor issue proceeds and also provide more confidence to other investors. The market regulator proposed these strict norms for IPOs as ₹ one trillion-plus mop-up has been planned to raise through IPOs. 

The major contributors to this amount are the newcomers and loss-making companies. To decide the rules, SEBI has issued a consultation paper for market feedback. SEBI also stated that in the offer documents proposes to raise new funds under the head “Funding of Inorganic Growth Initiatives”, and it includes future acquisitions, strategic partnerships by the company and investment in the new business initiatives. 

However, the companies/start-ups are silent on the specific investments to be proposed from the issue proceeds. And raising funds for some anonymous acquisitions leads to uncertainty in the IPO process.

Zomato, PolicyBazaar and Paytm, start-up IPOs, have mentioned their objective of raising funds for growth initiatives and funding acquisitions. Thus, SEBI wants the companies applying for IPO to have a definite plan for the end-use of the funds. It will assist the regulator in better monitoring of the companies and will provide more surety to the investors about their money. 

Currently, the companies are allowed to raise to 25 per cent under a miscellaneous head “general corporate purpose (GCP)”. After the implications of the new norms, companies would be able to raise to 35 per cent under the combined head of “inorganic growth initiative and GCP”. Also, the upper cap of 35 per cent would not be applicable if the companies were more explicit about their plans while applying for IPO.

Further, SEBI has mentioned the high dilution of the existing shareholder’s rights through IPO. Initially, IPOs have been a route for financial investors to exit or lower their stake in the company. 

SEBI wants to ensure that it regulates this. Therefore SEBI has proposed that companies, which have no distinguished promoters, can sell over 20 per cent at most half of their pre-IPO holdings. And the remaining stake will be locked for at least six months from the IPO.

Additionally, SEBI wants to monitor the issue money raised under the head “GCP”. Therefore, the regulatory agency demands that the companies raising funds through IPOs appoint a monitoring agency. And the agency would scrutinize whether the funds are legitimately used for the reasons mentioned in the offer document of IPO. As of now, GCP is not under inspection. Moreover, these restrictions proposed by SEBI would not be liked by the companies planning to get listed on the stock market.

EDITED AND PROOFREAD BY NIKITA SHARMA