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India’s SEBI encourages fintech start-ups

The Securities and Exchange Board of India (Sebi) has issued guidelines for tech start-ups and other fledgling businesses listed on its Innovators Growth Platform (IGP) – formerly the Institutional Trading Platform (ITP) until its renaming last December – that seek to trade on the main board of the stock exchange.

The ITP served as “a window on the stock exchanges where [Indian] e-commerce, data analytics, bio-technology and other start-ups could list and offer their shares for trading.”

A consultation paper issued this week by Sebi proposes that a company seeking to proceed to the stock market should be listed on an IGP platform for at least one year and have at least 200 shareholders for it to be eligible to trade on the main board.

The securities market regulator also published a framework for an innovation sandbox for helping non-regulated firms to tap market data feeds to test new product ideas. The initiative is being put forward to capitalise on fintech innovation within India's capital markets environment.

In a separate announcement Sebi said that it will permit mutual funds (MFs) to participate in exchange-traded commodity derivatives (ETCDs). However, the regulator has decided to keep away MFs from trading in derivatives of sensitive commodities.

Fintech ‘a catalyst’

Sebi’s proposed ‘innovation sandbox” would create a closed environment in which fintech firms could experiment with and test innovations.

The regulator believes that fintechs should have access to market-related data, which is otherwise not readily available to them, to enable them to test their innovations effectively before the innovations go live and develop an ecosystem that promotes innovation in the securities market

“Sebi believes that encouraging adoption and usage of financial technology would a have a profound impact on the development of the securities markets,” the regulator stated. “Fintech can act as a catalyst to further develop and maintain an efficient, fair and transparent securities market ecosystem.”

The proposals, if adopted, would see firms in the sandbox gain access to a drip-feed of anonymised and historical depositories data (holding data, know-your-customer (KYC) data), stock exchange data (transactions data like order log, trade log) and mutual funds transactions data.

Rules of engagement

Many of India’s fintechs and e-commerce firms such as Flipkart, Paytm and InMobi have raised multiple rounds of funding from private equity and venture capital investors.

However, to date they have steered clear the public markets for various reasons including the valuation gap between what a company expects and the market’s willingness to pay for it, and retail investors’ lack of understanding about the business models of companies in these sectors.

For firms that now want to explore these markets and seek a listing, Sebi outlines three broad categories that focus on minimum promoter capital in the company, their lock-in period on share capital, and promoters’ track record as other eligibility criteria for such companies to trade on the main board.

Promoters should contribute at least 20% of the total share capital. Such capital, including contribution made by alternative investment funds (AIFs), foreign venture capital investors or any other public institution including banks, shall have a lock-in period of three years from the date on which trading approval is granted.

Any contribution to capital exceeding the 20% threshold shall be locked-in for one year, SEBI said. It added that a consultation period in the proposals will run to June 10.

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