India’s start-up wave

It was in the 80’s that the word entrepreneurship gave way to start-ups. Infosys, Tata, TCS launched their software ventures and became giants over time. The 90’s saw the internet companies such as Naukri.com, Shaadi.com and MakeMyTrip take the country by storm. By the turn of the 20th century, powered by the internet and online services, the country has seen start-ups in virtually in spheres – from Paytm,to RedBus, from Flipkart to Zomato India has witnessed and will continue to witness one success after the other.

The tide was turning in favour of start-ups despite hiccups in the form of finding suitable funding options. Initially, there was no option for start-ups to be listed on stock exchanges. With growing start-up requirements, many start-ups looked global. In fact in 2010, MakeMyTrip was one of the first start-ups to be listed on Nasdaq alongside already listed Indian corporates – Infosys, HDFC, Dr. Reddy’s Laboratories etc.

The current government gave a new pitch for such start-up to level play with existing successful corporates. To this effort, the market regulator SEBI played a great role. However, that changed in 2015. SEBI launched the “Institutional Trading Platform” (ITP). The ITP was established as a trading platform for start-ups to be listed. Many rules and regulations were stipulated to this effect.

SEBI’s great pitch

Recently, SEBI announced a host of measures to relax norms for start-ups with a view to encourage their listing on the stock exchange(s). This is particularly encouraging for start-up ventures in fields like biotechnology, e-commerce, data analytics and related areas as it would pave the way for them to raise funds relatively easily.

The core group

In June, 2018 SEBI constitute a core group consisting of experts and stakeholders from various start-ups, lawyers, bankers, merchant bankers, venture capitalists and stock exchanges to brainstorm on effective ways of encouraging start- ups in listing and trading on stock exchanges. They submitted their recommendations and was followed by publishing a paper for public to share their recommendations as well.

Proposals that have been approved by SEBI

Primarily, the “Institutional Trading Platform” (ITP) has been re-visited. The ITP was created by SEBI in 2013 to enable Small and Medium Enterprises (SME’s) and Start-ups to list their securities on the ITP without actually having to go through an initial public offering (IPO). This intended to give more visibility to such start-ups and enable them to raise capital without spending too much money and time on compliance. It also provided credible and transparent dealings to entities interested in investing in such start-ups. Besides renaming the ITP as “Innovators Growth Platform”, the SEBI has approved the following proposal / recommendations:

1. The minimum trading lot has been reduced from Rs. 10 lakhs to Rs. 2 lakhs. While this is intended to encourage more start-ups to list their securities, it is intended to help them with their liquidity.
2. 25% of the pre-issue capital should be with qualified institutional buyers (QIB’s) for at least 2 years. Such QIB’s should be a family trust with a net worth of at least Rs. 500 Crores.
3. A new class of investors has been introduced – “accredited investor”. An individual investor  with a gross total income of Rs. 50 lakhs per annum and a minimum liquid net worth of Rs. 5 Crores. For a corporate entity, it has to be a net worth of Rs. 25 Crores. Such accredited investors can hold up to 10% stake before listing.
4. The post issue capital holding of 25% (by investors) in start-ups has been removed. Now investors can hold more than 25% post issue capital holding. This will encourage more investment in start-ups.
5. Previously, it was mandatory to make a minimum net offer of 75% to be allocated to institutional investors and 25% to non institutional investors. Now there is such no minimum reservation for any category of investors. SEBI has also done away with the hitherto requirement of limiting allocation at 10% for a single institutional investor.
6. Institutional investors holding at least 25% of the investment should stay invested in the start-up for a minimum period of 2 years.
7. Start-ups can now allot shares to a minimum of 50 allottees as compared to the earlier minimum requirement of 200 allottees.
8. Hitherto, start-ups had to wait for a time period of 3 years to migrate from the start-up trading platform to the main bourses. That waiting period has been brought down to 1year, subject to compliance of the exchange requirements.
9. The minimum offer size of start-ups registering with ITP has been fixed at Rs. 10 crores. This is intended to bring in credible investors and also ensure sizeable volume of investments for start-ups.
10. Other recommendations include for investors in such start-ups to have voting rights, board representation and corporate governance requirements. These are under consideration by SEBI

The bottom line

Continuing the efforts towards “ease of doing business in India”, the SEBI announcements relaxing norms listing for start-ups are a bunch of Christmas goodies gifted to Start-ups. This is especially true for India start-ups who have preferred to source funding through private equity instead of through the listing route given the challenges in fulfilling the compliance requirements. This has also pushed for them to prefer listing outside (For instance, MakeMyTrip got listed in Nasdaq a couple of years ago).

While most start-ups are still at a very nascent stage figuring out the best business model / strategy that will work for them, SEBI has lent out a helping hand by easing the listing norms and encouraging giving boost to new age companies in their start-up stage. With AI and drones topping the list of start-ups to take on India in 2019, watch this space for more!

We debuted our “What’s brewing” section in Law Tree edition #29 with drones – their evolution, development, uses and the need to be regulated by law.

To recapitulate, in a nut-shall, remotely piloted aircraft is widely known as ‘drone’. Drones are piloted from a remote pilot station.

Almost a year later, drones are making news again for finally beginning to be regulated by law. In August, 2018 the Director General of Civil aviation (DGCA) put out a draft policy thereby ending years of speculation and ambiguity. The policy which became effective from 1st December, 2018 clearly laws down provisions that govern use of drones.

Starting 1st December, 2018 the National Drones Policy has come into effect. Called the “Drone Regulations 1.0”, the policy lays down where, when, how and who can operate drones legally in India.

In fact, the Ministry of civil aviation has begun online registration of drones in India. A look at the highlights of the policy:

1. 1. The DGCA has classified drones into 5 categories – (i) Nano (ii) Micro (iii) Small (iv) Medium and (v) Large. This classification seems to be based on the weight of the drones ranging from 250 grams or lesser up to 150 kgs and more.
2. Nano drones which weigh less than or equal to 250 grams do not require registration or license to be used. Drones in all remaining other categories will required mandatory registration /license for use.
3. In accordance with the Aircraft Act and Rules, those drones getting registered will be issued a Unique identification number (UIN) or Unmanned Aircraft Operator (UAOP) Permit subject to fulfilment of requisite conditions and  payment of prescribed fee. Such registration / license is valid for a period of 5 years. It can be flown only by persons above 18 years of age, with minimum under graduate qualification and having undergone practical training as approved by DGCA.
4. All categories of drone flights should happen only in day time and within the “Visual Line of Sight”.
5. No Remote pilot can operate more than one unmanned aircraft at any time. There should not be human or animal loads on them.
6. Drone flights should not cause danger to the general public and property.
7. Manned aircrafts will continue to get priority for flight approvals.
8. Insurance shall be made mandatory to cover third party loss or damage.
9. The Ministry of civil aviation is in the process of demarcating areas into various zones – “Green zone”, “Yellow zone” and Red zone”. While no permission is required to fly in green zones, permission is mandatory to be obtained to fly in yellow zone. No drone flights are allowed in the Red zones.
10. Besides the above, several restrictions have been put in place – Remote Piloted Aircrafts (RPA’s) cannot be flown within 5 kms of the perimeter of all major airports and within 3 kms from the perimeter of any other airport. They cannot be flown in temporary or permanent prohibited, restricted and within 25 kms from international border including the LoC as defined in the policy. It cannot fly beyond 500 meters into sea and within 3 kms- 5kms from the perimeter of military installations, Government buildings and Secretariat and Parliament. Prior permission has to be obtained for flying within Eco sensitive zones National parks and wildlife sanctuaries.
11. Violations will attract penal provisions under the Indian Penal Code, 1860 as well as the Aircraft Act 1934.

The opening of the skies (literally) for the use of drones in a legitimate manner has opened up a Pandora’s box of uses. From hospitals wanting to transport organs for transplant, Food delivery services such a Zomato acquiring drone start up for using drone to deliver food, municipal corporations using it to survey properties, construction industry using it in an efficient and timely completion, using it in dense forests and hostile terrains, prevent disasters and help in disaster management, improve farming and general surveillance drones are being put to effective use. It is no more a mere play thing. If used appropriately they will go a long way in the development of the society.  In order to make the drone legislation more effective, the Ministry of Civil aviation has constituted a task force to make recommendations of Drone Policy 2.0. Watch out! A drone could be hovering above your head!!