It is a perennial problem for entrepreneurs and startups to find suitable investors for their company. To simplify the process, in October 2013 SEBI allowed small and medium enterprises (SMEs) to enlist their specified securities in the Institutional Trading Platform (ITP) of stock exchanges without having to announce initial public offering (IPO). This gives SMEs and startups wider visibility and will allow them to raise capital through trading of specified securities without having to go through the lengthy and complex IPO process. Moreover, the ITP will give angel investors, venture capital firms and other investors to invest their money in a more secured and transparent manner and granting them easier entry and exit mechanism for such investment. Live trading on the BSE ITP platform started from 11 February 2014.

However this process is not open for all SMEs and startups, only certain startups which meet certain regulatory and financial criteria will be eligible for listing.

Who are eligible for listing?

• Any SME or startup which is a public company and who does not have any securities listed on any of the recognised stock exchanges in India and meets the following:
  • Regulatory criteria – The company, board of directors and promoters of the company is not a wilful defaulter or a sick company which has been referred to Board for Industrial and Financial Reconstruction in last five years or a winding up petition against the company has been admitted by a court or regulatory action has been taken by RBI, IRDA, SEBI or Ministry of Corporate Affairs in last five year.
  • Financial criteria – The revenues of the company does not exceed 100 crores in any of the previous financial years, or paid up capital of the company is not more than 25 crores.
  • Past funding criteria – The company has received investment of atleast 50 lakh rupees in equity shares from venture capital fund, alternative investment fund, angel investor or other categories of investors/lenders or received finance from a merchant banker for its working capital needs or project finance needs in last three years or a registered merchant banker or a qualified institutional buyer has invested atleast 50 lakh rupees in equity shares and their shares will be locked-in for a period of 3 years from the date of listing or a specialized international multilateral agency or domestic agency or a public financial institution has invested in the equity capital of the company.
  • Exchange criteria (BSE SME ITP) – The company must have minimum net tangible asset of rupees one crore or the net income of the company is not less than rupees 50 lakh. There is no change in the promoters of the company in last one year from the date of filing of application. In case the company has received investment from a merchant banker, the merchant banker must submit a due diligence certificate in a specified format.
  • Other criteria – The company should not be more than 10 years from the date of incorporation and it should have audited financial statement for the previous financial year.

How to list specified securities?

• The company should apply to the ITP in a specified format stating all the mandatory disclosures about the finances, assets, promoters and other necessary disclosures.
• The application need to be accompanied by other specified documents (See Detailed checklist of documents to be submitted for listing).
• The draft and the final disclosure documents need to be approved by the board of directors and must be signed by the Managing Director and the Chief Finance Officer or any other person who heads the finance function of the company.
• The disclosures will be published in the website of the stock exchange for a period of atleast 21 days. However, this disclosure is much simpler and less onerous than in an IPO and has minimal regulatory intervention.
• The stock exchange may grant in-principle approval to such listing. When a company has received in-principle approval for listing of such securities, such company will be deemed to have waived of from following the rule 19(2)(b) of Securities Contracts (Regulation) Rules, 1957 for the limited purpose of listing on ITP.
• The stock exchange may grant approval for listing of the securities in the ITP if the application complies with the regulations and have prior approval as needed under the bye-rules of the company.
• Once the approval is granted by the ITP, the company and the ITP will enter into a listing agreement.
• The listed companies must compulsorily sign with both the central depositories – National Securities Depository Ltd (NSDL) and Central Depository Services Ltd (CDSL).

Conditions for raising capital

• Once a company has listed its securities in the ITP, it can neither issue securities to the public in any manner nor can it call for an initial public offering (IPO).
• The company is permitted to raise capital through private placements or rights issue. In case the articles of association of the company does not provide for such options, the company need to amend its AoA in a suitable manner.
• The securities will be transacted only in dematerialised format (demat) and minimum trading lot on ITP will be 10 lakh rupees and have a tick size of one rupee.
• The promoters of the company must hold not less than 20 percent of the post listing capital and such stake holdings of the promoters cannot be diluted (locked-in) for a period of three years from the date of listing.

Private placement

• If a company wishes for private placement of its securities, it has to take in-principle permission of the stock exchange, approval of the shareholders of the company, disclosures to be made in an explanatory statement to the shareholders and complete the allotment within two months of obtaining such approval.
• The statement of disclosures must include the following:

(i) the purpose for private placement;

(ii) identity of allottees;

(iii) whether allottee is a promoter or belongs to the promoter group and if

not the relationship between promoter and allottee;

(iv) nature of securities being issued;

(v) price at which the security is being issued.

• The explanatory statement of disclosures made to the shareholders must be send to the stock exchange atleast fifteen days prior to the general body meeting where the approval of such private placement will be sought for.
• The price of securities issued through a private placement will not be less than the higher of either of the following:
  • The book value of equity shares as per the last audited financial statement (provided it is not older than six months)
  • The value of shares as determined by an independent auditor or a registered merchant banker

Rights issue

• The company can make a rights issue without an option for renunciation of rights.
• If a company wishes for private placement of its securities, it has to take in-principle permission of the stock exchange,
• The company has to send letter of offer to the shareholders through registered post or speed post or through electronic mail and must also publish such notice in the website of the company and the stock exchange.

Exit

The exit mechanism under the ITP is simpler in comparison with delisting from the main board of the stock exchange. A company may exit the platform by taking approval of the shareholders through a special resolution and the approval of the stock exchange where the securities are listed. The company will have to exit the ITP in case: the securities are listed for more than 10 years, the company has paid up capital of more than 25 crores, generated revenue worth 300 crores or has market capitalisation of more than 500 crores. The stock exchange can terminate the listing of a company if it has violated the listing agreement, failed to file period filing with the stock exchange or has failed to comply with the corporate governance norms for more than one year.