Startup Dreams Get a Lift: SEBI Relaxes IPO, Reverse-Flipping Norms

The Securities and Exchange Board of India (SEBI) announced a number of initiatives on 18 June to promote more companies listing on the stock exchanges after reverse flipping to India.

These new initiatives lessen the burden of compliance in the stock market ecosystem, and permit increased foreign investment in government bonds.

The rule that prevents start-up founders and promoters from holding Employee Stock Options (ESOPs) and other share-based rewards when they file their draft red herring prospectus (DRHP) for a public share offering was also abandoned by the market watchdog.

While SEBI has prohibited new ESOP issuances in the lead-up to the filing, it has permitted promoters to retain existing ESOPs that were issued a year before the filing of their DRHP.

Scrapping the Rule for Compulsorily Convertible Securities

The Board also eliminated a requirement mandating investors in fully paid-up Compulsorily Convertible Securities (CCS) to retain shares resulting from the conversion of such securities for at least a year during its meeting, which was chaired by Tuhin Kanta Pandey.

According to the Board, this has prevented some investors from taking part in the public offering of the offer for sale. Companies considering reverse flipping—the practice of shifting a company's domicile from a foreign country to India in order to allow domestic listing—will benefit from these regulatory changes.

Additionally, SEBI permitted shares owned by public financial institutions, alternative investment funds (AIFs), and overseas ventures to be included in the minimum promoter contribution needed for a public offering.

SEBI chairman Pandey stated that the regulator has established a working group to investigate the unbundling of charges by clearing corporations, despite the fact that clearing firms were not formally on the board's agenda.

The head of SEBI stated that these fees must be revealed to investors and cannot be a "black box".

In contrast to the previous position, when the regulator had considered separating clearing firms from parent exchanges, he stressed that the ownership structure of clearing corporations will remain unchanged.

Easing Out Other Rules Making a Wider Road For Startups

Additionally, SEBI has loosened the regulations governing the delisting of public sector enterprises (PSUs) with more than 90% government ownership. According to Pandey, the exemption will help around five listed PSUs and won't apply to banks, NBFCs, or insurance businesses.

A distinct category for foreign portfolio investors (FPIs) to invest in government securities (gsecs) was also introduced by the market regulator. KYC rules for these investors will be eased, much like the RBI's. Additionally, these FPIs will receive a longer period of time to notify major changes and respite from making granular disclosures.

Additionally, SEBI authorised modifications to the rules regulating angel funds, started talks on loosening accreditation, and permitted Category-I and -II AIFs to create co-investment vehicles. Furthermore, the board retracted its December 2024 ruling that mandated merchant bankers and other regulated firms divide their non-core or non-regulated activity into distinct entities.

It will be possible for merchant bankers to carry on with their operations that are governed by other financial authorities. However, if the aforementioned conduct is unregulated, like in an unlisted market, merchant bankers will have to tell their clients.

A payment plan for brokers implicated in the National Spot Exchange (NSEL) scam has also been approved by the SEBI board. Furthermore, a venture capital fund settlement plan has been unveiled.

Additionally, before the DRHP was filed, the market regulator required that the shares of several important shareholders, including senior management, be dematerialised.

The eligibility requirements for listing on social stock exchanges and other standards for investment advisors and real estate investment trusts were also loosened by SEBI. Additionally, the market regulator made disclosure paperwork easier to understand for portfolio managers.