Startup Listing To Sustainability Reporting, Here Are Key Changes SEBI Approved
The SEBI building in Mumbai. (Source: BloombergQuint)

Startup Listing To Sustainability Reporting, Here Are Key Changes SEBI Approved

The market regulator eased open offer requirements and eligibility criteria, among other changes, for startups to list in India to stem the trend of local new-age ventures choosing to go public overseas.

The Securities and Exchange Board of India, in its Thursday board meeting, approved changes for startup listing on the on the Innovators Growth Platform. It also cleared changes to rules governing sustainability reporting, reclassification of promoters, dividend distribution policy and constitution of a risk management committee.

Here are the key changes approved by the market regulator:

A Streamlined Delisting Process

SEBI’s board has approved changes to norms governing documentation and timeline compliance by promoters to make it easy for entities to delist. A few important changes are:

  • Promoters will be required to disclose their intention for delisting a company by making an initial public announcement. Reasoned recommendation for delisting must be given by a committee of independent directors.

  • SEBI revised timelines for completion of various delisting processes.

  • Promoters or acquirers can provide an indicative price for delisting which cannot be less than the floor price.

  • They will have to accept the price discovered through reverse book building if it's equal to the floor or indicative price.

Fewer Restrictions For Alternative Investment Funds

Alternative investment funds pool in money for investing in real estate, private equity and hedge funds. First introduced in 2012, their popularity has considerably increased, prompting the regulator to streamline the regulations further. SEBI has announced a slew of changes in norms for investment restriction and code of conduct for key personnel in such funds.

The changes include:

  • Allowing alternative investment funds to simultaneously invest in units of other AIFs, besides direct investment in securities of investee companies.

  • SEBI has provided clarity on scope of responsibilities of managers and members of investment committees in such funds.

  • To ensure better compliance by AIFs, a code of conduct for the funds, their directors, along with designated partners or trustees has been introduced.

Investor-Centric Changes In Listing Regulations

To improve corporate governance, SEBI announced a string of changes in the listing regulations to ensure better investor protection, quicker dissemination of data and streamlined disclosure requirements.

Key changes include:

  • Top 1,000 listed entities by market capitalisation must formulate a dividend distribution policy.

  • For board meetings spanning multiple days, disclosure of financials must be made within 30 minutes from the end of meeting on the day when financial results are considered.

Sustainability Reporting

Investment funds and companies worldwide have started assessing the environmental, social and governance practices in companies before making investment decisions. And they assign higher value multiples to sustainable companies like Tesla Inc. ESG-based investments are picking up in India as well.

India's market regulator took a first step to promote such investments by introducing Business Responsibility Reporting by the top 100 listed companies in 2012. That was increased to cover top 500 entities in 2015-16 and the top 1,000 entities by market capitalisation in 2019. SEBI has now said:

  • Top 1,000 listed entities must prepare Business Responsibility and Sustainability Report voluntarily for FY 2021-22 and mandatorily from the next fiscal year.

  • The disclosures will comprise two parts—voluntary and mandatory.

  • The format is aligned with internationally accepted reporting frameworks like the Global Reporting Initiative or Sustainability Accounting Standards Board standards.

Allowing interoperability in the BRSR report will be good for Indian companies having global operations, according to Sonal Verma, partner at the law firm Dhir & Dhir Associates. For instance, he told BloombergQuint, that all U.K.-listed companies need to be compliant with the TCFD standards by 2025. The principle will help an Indian company list on London markets as BRSR will take care of TCFD compliance, he said.

The suggested timeframe would be sufficient for companies to adapt BRSR and help India in its commitment to achieve UN sustainable developmental goals, he added.

If entities are following GRI metrics, they are in a far more better situation to adapt to the TCFD standard. The alignment of existing BRR with the international GRI standard had started over the last five years in India. As most of the frameworks are key performance indicator based, a principle-based interoperability would help to weed out duplication of ESG efforts on a global level for Indian entities.
Sonal Verma, partner, Dhir & Dhir Associates

Disclosures On Analyst Meets

The regulator has been trying to address information asymmetry by ensuring that many critical disclosures by companies are available to a wider range of investors. As listed entities participate in analyst or institutional investor meets, information discussed in these is important. SEBI settled a case last year where it had alleged violation of insider trading norms based on information discussed in an analyst meeting.

SEBI has now mandated listed entities to disclose audio or video recordings of such meetings on their websites before the next trading day or 24 hours, whichever is earlier. Transcripts of such meetings must be made available within five days.

So far only written material was required to be provided, Bhakta Patnaik, head of capital markets practise at Trilegal told BloombergQuint. Oral discussions being made available to public is a step towards a more transparent and stricter insider trading standards being introduced in the Indian markets, he said.

Reclassification Of Promoters

The regulator came out with a consultation paper in November, pointing towards a need to simplify, streamline and bring greater clarity in the norms on reclassification of promoters. It requires evaluation by the board before it is send for shareholder approval. And it also requires compliance with certain norms on shareholding, control and special rights .

The regulator has now proposed exemption from such requirements in the following instances:

  • If reclassification is done pursuant to an order of the regulator in line with existing exemption available for resolution plans approved under Sec. 31 of the insolvency code.

  • When a promoter seeking reclassification holds less than 1% shareholding.

  • A few procedural requirements can be exempted if the outgoing promoter’s intent is disclosed in the letter of offer or scheme of arrangement, subject to few other compliance requirements.

The changes dispense with certain procedural requirements that proved rather cumbersome for outgoing promoters seeking reclassification, Tomu Francis, partner at Khaitan & Co., said. As 'promoter raj' in India is touted to gradually give way to professionally run companies, making the process of reclassification simpler and removing certain obvious and unnecessary hurdles was important, he said.

Being classified as a promoter concomitantly gives rise to onerous obligations under securities laws like disclosure of acquisition, pledge, etc. by the promoter as well as fastens the liability in case of certain actions by regulators like compulsory delisting. An easier process for reclassification, especially for people holding negligible shares, is welcome
Tomu Francis, partner, Khaitan & Co

Access To Innovator’s Platform Eased

India is a home to more than 100 Unicorns — startups valued at more than $ 1 billion. It has the third largest ecosystem of such entities mopping up more than $ 63 billion in capital since 2016. Yet, many of these startups may prefer a direct overseas listing or go through the SPAC route as compared to a listing in India.

It’s not that the Indian stock exchanges didn’t try attracting domestic startups. The Innovator’s Growth Platform, introduced in 2015, failed to gather momentum initially, prompting the market regulator to ease norms and introduce concepts like investor accreditation while weeding out redundant compliances.

To make the platform even more accessible, the SEBI board has proposed:

  • Existing requirement for an issuer to have 25% of the pre-issue capital to be held by eligible investors for a period of two years has been reduced to one year.

  • Issuer company can now allocate up to 60% of the issue size on a discretionary basis prior to opening of an issue.

  • Entities which have issued superior voting rights to promoters or founders will be allowed to list on the innovator platform.

  • Stipulation for triggering open offer requirement for IGP-listed entities has been increased from 25% to 49% of the total equity. But an open offer will be triggered irrespective of the threshold if there is a direct or an indirect change in control.

Calling the changes a "good move", Shruti Rajan, partner at Trilegal, said the concession granted on triggering an open offer will be interesting to track. Although the trigger for such companies has been moved to 49%, they will still need to be mindful of a change in “control”, which may lead to interesting situations, especially given how shareholder rights can be structured in startups, she said.

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