SEBI's Drive to Classify Promoters Could Thwart IPO Plans of Startups

The Securities and Exchange Board of India (SEBI) has recently tightened the regulations on promoter categorization. As a result, many startups may face challenges in their initial public offering (IPO) plans. In this article, we will discuss the new SEBI regulations and their impact on startups.

Understanding SEBI's Regulations on Promoter Categorization

SEBI has defined different categories of promoters based on their role in the company. The four categories are Promoter, Promoter Group, Key Managerial Personnel (KMP), and Relatives of Promoter. The promoter is defined as the person or entity that has control over the affairs of the company. Promoter Group includes all persons and entities that are related to the promoter and have a common goal to control the company. KMPs are individuals who are in charge of the day-to-day operations of the company. Relatives of the promoter include spouses, parents, siblings, and children.

SEBI has now made it mandatory for companies to disclose the category of each promoter in their IPO prospectus. The regulator has also tightened the rules for the re-categorization of promoters. Companies can now only re-categorize a promoter if they meet specific criteria, including maintaining a clean track record for three years and having a non-promoter shareholding of at least 10%.

Impact of SEBI's Regulations on Startups

The new regulations could prove to be a significant hurdle for startups planning to go public. Startups usually have a complex structure with multiple shareholders, including angel investors, venture capitalists, and private equity firms. SEBI's regulations could lead to delays in the IPO process as startups would need to provide detailed information on the categorization of each promoter.

Moreover, many startups have raised funds from foreign investors, who may not fall under any of the promoter categories defined by SEBI. Such investors may need to be restructured or exit the company to comply with the new regulations.

The regulations could also impact the valuation of startups. If foreign investors exit the company, it could lead to a decline in the valuation, which would affect the IPO pricing. Moreover, if a promoter is classified as a Promoter Group, it could lead to concerns among investors about the concentration of power and decision-making.

Conclusion

SEBI's regulations on promoter categorization are a step towards ensuring transparency in the IPO process. However, startups may face challenges in complying with the new regulations. The regulations could lead to delays in the IPO process, impact the valuation of startups, and lead to a restructuring of the shareholder base. It remains to be seen how startups will navigate these challenges and continue to raise funds from the public markets.