Regulatory Updates – Half-Yearly Report – September 30, 2013

Regulatory

1) The Securities and Exchange Board of India (‘SEBI’) updates regulation in relation to Alternative Investment Fund (“AIF”) and notifies regulation for “Angel Fund”.

With an aim to encourage entrepreneurship in the country by financing small start-ups, SEBI, vide its notification dated 16 September 2013, amended AIF Regulations to notify new norms for angel investors, who provide funding to companies at their initial stages. Such angel funds are to be a sub-category in Category I – Venture Capital Fund.

• This regulation has defined “Qualified Investors” for the purposes of an Angel Fund – In view of the high-risk investments of such funds, certain conditions have been imposed on investors as given below:
  • Individual angel investor should have net tangible assets of atleast INR 2 crores (excluding value of his principal residence) and shall satisfy the one of the following conditions:
    • has an experience of early stage investment; or
    • has experience of a serial entrepreneur; or
    • is a senior management professional with at least 10 years of experience
  • Corporate angel investor shall be required to have net worth of INR 10 crores; and
  • SEBI registered AIF / VCF
• The key characteristics of Angel Fund are defined as:
  • Angel Fund shall have a corpus of atleast INR 10 crores (as against INR 20 crores for other AIFs);
    • Minimum investment by an investor shall be INR 25 lakhs (may be accepted over a period of maximum 3 years) as against INR 1 crore for other AIFs;
    • The continuing interest by sponsor / manager in the Angel Fund shall be not less than 2.5% of the corpus or INR 50 lakhs (as against existing limit of INR 5 crores), whichever is less;
    • No scheme of Angel Fund shall have more than 49 angel investors;
    • Manager of the Angel Fund is required to obtain an undertaking from every angel investor confirming his approval before making any investment in a venture capital undertaking (‘VCU’); and
    • Units of Angel Fund cannot be listed on any recognized stock exchange.

  (Note: YourNest Angel Fund is a SEBI registered Venture Capital Fund. It does not fall under the new regulations & notification announced by SEBI for an Angel Fund on dated 16 September 2013.)

  2) Amendment to Securities Contracts (Regulation) Act, 1956 (‘SCRA’)

  SEBI has issued a notification on 3 October 2013 wherein the SEBI has relaxed certain provisions under Securities Contracts (Regulation) Act, 1956 (‘SCRA’) to boost the interest of investors by allowing them to include preferential clauses like right of first refusal (‘ROFR’), tag-along, drag-along and call-put option in the share purchase agreements / Articles of Association subject to certain conditions.

  3) Listing of SME

  SEBI has notified on 9 October 2013 “SEBI (Listing of Specified Securities on Institutional Trading Platform) Regulations, 2013” to permit listing of Startups and Small and Medium Enterprises (‘SMEs’) in Institutional Trading Platform (‘ITP’) without making an Initial Public Offering (‘IPO’).. The move is aimed at providing easier exit options to informed investor (such as Angel Investors, Venture Capital Funds and Private Equities).

  The key eligibility criteria’s for SMEs are given below:

  • The company has not completed more than 10 years from incorporation;
  • Revenue has not exceeded INR 100 cr in any previous financial year;
  • Paid up capital of the company has not exceeded INR 25 cr in any of the previous financial years;
  • No regulatory action has been taken against the company, its promoter or director by prescribed regulatory authorities within a period of 5 years prior to the date of application for listing
  • The company shall satisfy any one of the following criteria:
    • Investment of atleast INR 50 lakhs in equity shares of the company by AIF, VCF, other SEBI approved investors or specified angel investor;
    • Company has received finance (no minimum threshold specified) from a scheduled bank for its project financing / working capital requirement atleast before 3 years and the same has been fully utilised;
    • Investment of atleast INR 50 lakhs in equity shares of the company by registered Merchant Banker / Qualified Institutional Buyer which shall be locked in for 3 years from date of listing; and
    • a specialised international multilateral agency or domestic agency or a public financial institution has invested in the equity capital of the company (no minimum threshold specified).

  4) Unlisted Indian companies allowed to list and raise capital abroad

  The Ministry of Finance (MoF) in its Press Release dated 27 September, 2013 dealing with listing of Unlisted Indian Companies on overseas exchanges decided that unlisted companies allowed on a pilot basis for 2 years to raise capital abroad without the requirement of prior or simultaneous listing in India.

  Further notification and amendment issued on 11thOctober, 2013 by MoF & on 8th November, 2013 by RBI are as under:

  • Unlisted companies shall list abroad only on exchanges in IOSCO or FATF compliant jurisdictions or those jurisdictions with which SEBI has signed bilateral agreements;
  • The companies shall file a copy of the return, which they submit to the proposed exchange/ regulators, also to SEBI for the purpose of PMLA. They shall comply with SEBI’s disclosure requirements in addition to that of the primary exchange prior to the listing abroad;
  • While raising resources abroad, the listing company shall be fully compliant with the FDI Policy in force;
  • In case the funds raised are not utilised abroad, such companies shall remit the money back to India within 15 days and may be used domestically;
  • The ADRs/ GDRs shall be issued subject to sectoral cap, entry route, minimum capitalisation norms, pricing norms, etc. as applicable as per FDI regulations notified by the Reserve Bank from time to time;
  • The pricing of such ADRs/GDRs to be issued to a person resident outside India shall be determined in accordance with the captioned scheme as prescribed under paragraph 6 of Schedule 1 of Notification No. FEMA. 20 dated May 3, 2000, as amended from time to time;
  • The number of underlying equity shares offered for issuance of ADRs/GDRs to be kept with the local custodian shall be determined upfront and ratio of ADRs/GDRs to equity shares shall be decided upfront based on applicable FDI pricing norms of equity shares of unlisted company;
  • The unlisted Indian company shall comply with the instructions on downstream investment as notified by the Reserve Bank from time to time;
  • The criteria of eligibility of unlisted company raising funds through ADRs/GDRs shall be as prescribed by Government of India;
  • The capital raised abroad may be utilised for retiring outstanding overseas debt or for bona fide operations abroad including for acquisitions;

  5) Insurance Companies allowed to invest in Category II AIFs

  In March 2013, life and general insurance companies were allowed to invest in Category I AIFs, comprising infrastructure funds, SME funds, venture capital funds and social venture funds. The Insurance Regulatory and Development Authority (‘IRDA’), vide its circular dated 23 August 2013, has now expanded the permissible investment category to Category II AIFs subject to the condition that at least 51 per cent of the funds of such AIFs should be invested in infrastructure entities, SME entities, venture capital undertakings or social venture entities. Insurers, however, are not permitted to invest in AIFs that have the nature of funds of funds and leverage funds.

  The overall exposure to venture funds and AIFs put together should not exceed 3 per cent in the case of a life insurance company and 5 per cent in the case of a general insurance company. Exposure to a single AIF or venture fund should not be more than 10 per cent of the fund size (20% of the fund size in case of Infrastructure Funds).

  B) Corporate Laws

  The Companies Act, 2013, which seeks to replace the Companies Act, 1956 in consonance with changes in national and international economic environment, was notifies on August 30, 2013.

  The Companies Act, 2013, has, inter alia, introduced enhanced corporate governance standards particularly in relation to the independent directors, audit, corporate social responsibility, mandatory valuation, private placement of securities, cross-border mergers (including merger of Indian companies into foreign companies) and class action suits.

  The Companies Act, 2013 has introduced the concept of ‘One Person Company (OPC)’ and a “Small Company” that is a good step for Indian Start-ups. An idea or an Intellectual Property can be floated in an OPC with the benefits of limited liability and perpetual succession. Further, Small Company brings some ease in doing business during the early days of a venture.