Sebi relaxes funding rules for start-ups, bars PE-promoter side deals

Mumbai: To further boost securities market, Sebi on Wednesday relaxed funding rules for start-ups and allowed foreign investment in unlisted corporate bonds while it barred private equity funds and promoters of listed firms from entering into side deals for profit sharing.

Putting in place a stringent framework to protect minority investors' interests, the watchdog decided to stop listed companies and their top executives from striking compensation pacts with private equity funds without approval from their respective boards and public shareholders.

The latest raft of measures, cleared by the Sebi board at a meeting here today, comes amid larger efforts to attract more investors as well as deepen the capital market, which is seen having very high growth potential.

Continuing efforts to bolster the nascent start-up ecosystem, the Securities and Exchange Board of India (Sebi) has eased the rules for investments by angel funds in such entities and they can now invest in firms that are up to five years old, as against three years currently.

Further, the lock-in period for angel funds has been reduced to one year from three years while their minimum investment threshold has been cut to Rs 25 lakh from Rs 50 lakh. The move is expected to help start-ups that are in need of funds in the initial stage of idea generations.

The upper limit for number of angel investors in a scheme will be increased to 200 from 49.

In another measure to attract more overseas money, the regulator has decided to permit FPIs (foreign portfolio investors) to invest in unlisted corporate debt securities and securitised debt instruments with Rs 35,000 crore ceiling.

Total FPI investment in corporate bonds currently stands at over Rs 1.72 lakh crore, which is more than 70 per cent of the overall ceiling for all kinds of corporate bonds at over Rs 2.44 lakh crore.

FPIs will be allowed to invest in the unlisted corporate debt securities in the form of non-convertible debentures (NCDs) or bonds issued by an Indian public or private company.

Clamping down on secret profit-sharing agreements between private equity funds and promoters of listed firms, Sebi has restrained them from entering into any such pact without prior approval of the board and public shareholders.

The restrictions will also apply to employees, including key managerial personnel and directors of listed companies, for themselves and on behalf of any other person.

With regard to angel investors putting money in start- ups, the board has approved amendment to Sebi (Alternative Investment Funds) Regulations, 2012, following which the definition of start-up for angel funds investments will be similar to definition given in DIPP's start-up policy.

"Accordingly, angel funds will be allowed to invest in start-ups incorporated within five years, which was earlier 3 years," Sebi said.

To diversify risks, Sebi has also allowed the angel funds to make overseas investments up to 25 per cent of their investible corpus, in line with other AIFs.

Angel fund, a sub-category of AIF, encourages entrepreneurship in the country by financing small start-ups at a stage where such firms find it difficult to obtain capital from traditional sources of finance such as banks and financial institutions.

Presently, 266 AIFs are registered with Sebi.

Allowing more investment avenues for FPIs, Sebi said investments in the unlisted corporate debt securities will be subject to minimum residual maturity of three years and end use-restriction on investment in real estate business, capital market and purchase of land.

"The expression 'Real Estate Business' shall have the same meaning as assigned to it in the Foreign Exchange Management (Transfer or issue of Security by a Person Resident outside India) Regulations," the regulator said.

Among others, the Sebi board permitted FPI investment in securitised debt instruments, including certificate or instrument issued by a special purpose vehicle (SPV) set up for securitisation of asset with banks and other financial institutions. The permitted avenues include certificate or instrument issued and listed in compliance of Sebi norms.

"Investment by FPIs in the unlisted corporate debt securities and securitised debt instruments shall not exceed Rs 35,000 crore within the extant investment limits prescribed for corporate bond from time to time, which currently is Rs 2,44,323 crore.

"Further, investment by FPIs in securitised debt instruments shall not be subject to the minimum three-year residual maturity requirement," Sebi said.

While cracking the whip on side deals between PE funds and promoters of companies, the market regulator has also said that all such agreements entered during the past three years, even if they are not valid now, should be communicated to the stock exchanges for public dissemination.

Existing agreements entered into prior to the date of notification and which may continue to be valid beyond such date will need to be intimated to the bourses and approval will be required from public shareholders by way of an ordinary resolution in the forthcoming general meeting.

"Interested persons involved in the transactions shall abstain from voting on the said resolution," Sebi said.

Several instances of private equity funds entering into compensation agreements with promoters, directors and key managerial personnel of listed investee companies based on performance of such companies have recently come to light.