SEBI allow start-up IPOs seek PEs for lock-in need

Securities and Exchange Board of India (SEBI) has decided to allow start-up companies seek money from PEs and other funds to meet their share lock-in requirements. The market regulator aims to help these start-ups tap capital market.

As per SEBI’s regulations, promoters are required to lock-in at least 20 per cent stake in the company for at least three years after allotment of shares in Initial Public Offer (IPO). Besides, any holding in excess of this minimum 20 per cent promoter stake, is required to be locked in for one year. 

To encourage start-up entrepreneurs, who are unable to meet the requisite 20 per cent contribution by themselves as promoters, SEBI has now decided to allow such start-up promoters to meet this requirement with help of SEBI-registered AIFs (Alternative Investment Funds). 

AIFs are a newly approved class of investors which include PE, SME, Infrastructure, VC funds, among others. However, the contribution of these AIFs would be capped at 10 per cent to meet the promoter share lock-in guidelines. The proposal has been approved by the SEBI board and would be soon incorporated into the relevant guidelines.

The decision was taken after a recommendation in this regard by SEBI’s Primary Market Advisory Committee (PMAC). 

The PMAC was of the view that in the companies founded by professionals or first-generation entrepreneurs, where the post-IPO equity held by promoters is less than 20 per cent, AIFs could be permitted to provide the balance equity, subject to a minimum 10 per cent being contributed by the promoters. 

The PMAC also suggested that the capital contributed by AIFs for this purpose shall be locked in for two years. 

SEBI, however, decided that the requirement of lock-in of three years should uniformly apply to both Promoters and AIFs. Further, SEBI has decided to review the lock-in tenure at periodic intervals, as per the international practice. 

The promoters are allowed to pledge their locked-in shares as collateral security for any loans granted for financing one or more of the objects of the issue, provided pledge of shares is one of the terms of sanction of the loan. 

The PMAC had suggested a relaxation in this regard by allowing pledging of locked-in shares for loans taken by the company for other objects of its business, as laid down in its memorandum and articles of association. 

SEBI, however, rejected the idea, as it felt that the existing restrictions were aimed at ensuring the commitment of the promoters towards the objects of the issue.