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India Legal Update: Recent SEBI Guidelines for Angel Investments, Buy-Back Norms & Listing Of Start-Ups & SMEs on Institutional Trading Platform (ITP) Without IPO

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Source: http://techcorplegal.com/Blog_Technology_Law_Business_Research/2013/06/26/sebi-guidelines-angel-investments/

The Securities and Exchange Board of India (SEBI) has recently issued fresh guidelines related to Angel Investments, buy-back through open market purchase and Listing of Start-Ups and SMEs on Institutional Trading Platform (ITP) without having to make an IPO.

Angel_Investments_India

1. Amendments to SEBI (Buy Back of Securities) Regulations, 1998 governing buy-back through open market purchase

With a view to safeguard the interest of public shareholders, SEBI has approved making it mandatory for the companies to buyback at least 50 percent of their repurchase offers. In addition to this, the companies are required complete their buyback offers within six months, a period which is presently 12 months. Those companies unable to meet the target would be barred from launching another offer for a period of one year.

The proposed guidelines also make it mandatory for the companies to keep 25 percent of the proposed buyback offer amount in an escrow account, a move that is proposed to prevent the companies from making non-serious offers that could wrongly influence the share prices.

2. Guidelines for Angel Funds: Amendments to SEBI (Alternative Investment Funds) Regulations, 2012

Subsequent to Union Finance Minister P. Chidambaram’s announcement in the Union Budget 2013-14, SEBI has issued guidelines for angel investor pools to be recognized as Category I AIF (Alternative Investment Funds) Venture Capital Funds.

In accordance with the SEBI Alternative Investment Fund (AIF) regulation, which allows pools of capital to be used in India for investments, Venture Capital Funds (VCFs) are included in Category.

Now, an angel fund will be a sub-category under the definition of VCFs.

The minimum investment amount for AIF investors, including VCFs, is at least Rs. 1 Crore or Rs. 10 Million (aprox. 165000 USD) for each investor.

For Angel funds, the requirement per investor is Rs. 25 lakh or Rs. 2.5 Million, which can be spread over three years, and the ticket size should not less than Rs. 50 lakh and not more than Rs. 5 crore. Such investments can only be done in a company incorporated in India having a turnover of less than Rs. 25 crore. Further, the company should be unlisted and should not be sponsored. It should not belong to an industrial group that has a turnover of more than Rs. 300 crore.

Angel Investment Criteria

For Individual Angel Investor:

  • Early stage investment experience, or
  • Been a serial entrepreneur, or
  • Had 10 years experience as a senior management executive, and
  • Has Rs. 2 crore worth of tangible assets.

For Companies that want to become Angel investors:

  • Rs. 10 Crore or Rs. 100 million net worth

The Implications

For individuals who are unable to meet this criteria, it is advisable to invest on their own without creating a SEBI regulated regulated AIF entity (Venture fund). With a view to manage issues related to taxation, investment can be done by way of convertible debt, which acts as a loan that can be converted to debt.

3. Enabling Listing of Start-Ups and SMEs on Institutional Trading Platform (ITP) without having to make an IPO

Considering a lack of exit opportunities for the existing investors and restricted access to new investors, and with a view to provide easier exit options for informed investors (Angel Investors, VCFs, PE), SEBI approved the proposal to amend the SEBI (ICDR) Regulations to permit listing of Start-ups and SMEs in Institutional Trading platform (ITP) without having to make an IPO.

According to SEBI, such companies eligible to be listed on this ‘Institutional Trading Platform’ shall be accessible for investment to the informed investors only.

Accordingly, the minimum amount for trading or investment on the ITP will be Rs 10 lakh. These companies shall be exempted from the requirements of rule 19(2)(b) of SC(R)R 1957 under which companies have to offer upto 25% of its shareholding to public through an offer document in order to get listed.

Hence, the listing can be done without an IPO and the expenses associated with it. While such companies are listed on the ITP, they will not be permitted to raise capital though they can continue to make private placements.

This provides various advantages, as listing on ITP by Start-Ups and SMEs is expected to offer their existing investors better chances to find alternate buyers.

SEBI also stated that standardized norms of entry for companies, eligibility criteria, continuous disclosure requirements, simplified exit rules and corporate governance norms will be prescribed.

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