Institutional Trading Platform…A Foot Forward….



India Inc. can from a bird™s eye view does not consist of only the bigger players in the market. Apart from the bigger players there consist a considerable percentage of the smaller players who have been consistently in pursuit of inorganic and organic expansions of their venture. There are instances in which the state has granted benefits and exemptions to industries that satisfy certain requirements to fall within the head small medium and micro industries. There is an unending thirst within the minds of the Ministry of Corporate Affairs (MCA) as well as the entrepreneurs to grow and expand horizons. The trading of securities in the primary and secondary market is a privilege possessed by just a fraction of the companies which have been incorporated in India after the existence of the Companies Act, 1956. Henceforth the prospects of growth is restricted or limited to the same fraction which is able to trade securities on an institutional platform. The means of raising capital for the larger fraction becomes bleak and their future drab.

Further to brighten the prospects of these small and medium industries who wish to raise capital with lesser compliance and costs on an institutional platform, the Securities Exchange Board of India (SEBI) have notified a regulation namely Securities And Exchange Board of India (Listing of Specified Securities on Institutional Trading Platform) Regulations, 2013(ITP Regulations). The ITP Regulations shall strictly apply on small and medium industries which fulfils the criteria as provided in 106Y of the ITP Regulations. The minimum investment which could be made on the ITP has been set at 10 lakhs (1 million) (INR).

Herein after venturing into analysing of the ITP Regulations I thereby enlist some of the pros and cons of the ITP Regulation.

There are various beneficial or we may say constructive features of this instant Regulation which I shall just throw light on, hereafter.

  • Earlier due to the deficiency of exit opportunities for existing investors and restricted access to new investors it posed as a major problem for the small and medium industries but after the coming in of the ITP Regulation easier exit options for entities such as Angel Investors, Venture Capital Funds and Private Equities have been provided.
  • The move might just boost the Indian economy which has been sluggish over this quarter of the financial year.
  • This provides for a wider fund raising capability on the part of the small and medium industries.
  • The much neglected sector got its much required attention by giving new modes of raising capital.
  • The sector more importantly would have an Institutional Trading Platform with a specific set of laws, regulations, bylaws and guidelines regulating the platform.
  • This move by SEBI would help to have a wider investor base.
  • Like all SEBI Regulations disclosure and transparency has been paid much attention and is taken good care of while trading securities.
  • Specific holding on the part of promoter i.e. 20 % and a lock in period of 3 years has also been provided for which instills confidence in the hearts of the prospective and existing investors.
  •  The flexibility of delisting securities of a company listed through such a route can exit the platform if the exchange approves it and its shareholders also allow such a move.
  • The small and medium enterprises which play a very crucial role in growth and productivity would have a very positive impact on the Indian economy.
  • The small and medium industries who wish to raise capital would need to go through lesser compliance and would incur lesser costs than following the traditional route.
  • It brings up financial discipline within young entrepreneurs.
  • It allows firms to discover a price for their stock so that raising the next round through private placement will have fewer debates on pricing and valuation.
  • The Regulation is one of the modes in which the small and medium industries can raise capital by excluding the traditional cumbersome procedural impediments.

There are a few points which need to be reconsidered in the ITP Regulations, few are listed down below

  • SEBI™s restrictions as provided for angel investors i.e. investment in an investee company by an angel fund shall be not less than Rs 50 lakhs and not more than Rs 5 crore and shall be required to be held for a period of at least 3 years furthermore the investment needs to be made in a firm which is up to 3 years old.  These restrictions might affect these investments as much of such investments happen in the early life cycle of a firm; it would take out access to such angel funds by firms.
  • Small and medium scale industries who list their securities on an ITP cannot issue securities through IPO it can be only made through rights issue or private placement.
  • No definition has been provided of a start up company in the ITP Regulations.
  • No lock in period has been prescribed for securities purchased through this platform.
  • Merchant bankers and Qualified Institutional Buyers have to compulsorily play the role of market maker for minimum of three years from IPO. This move that was aimed at proving liquidity to investors and exit opportunity to those who has entered these companies has been a major reason why the business community has not welcomed this concept of raising equity.
  • The promoters have not been comfortable with the level of scrutiny that listing brings along with itself. This is a major deterrent for promoters who are weighing the option for listing.
  •  One of the restrictions imposed in 106Y (e) in the ITP regulations which says the company should not be more than 10 years old, the cap on the age of the company could act as deterrent and become hindrance in the way of a huge number of struggling companies which are more than 10 years old but barely manage to float but not swim their way out to reach large profits in the humongous corporate world.

SME Listing has a tremendous potential and is also critical for a vibrant and well-represented capital market. SEBI and other regulatory bodies have to play very active role for this nascent sector.

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