Sebi may scrap crowdfunding norms mentioned in paper

Sebi may scrap crowdfunding norms mentioned in paper

As the very name suggests, crowdfunding is a diametrically opposite approach to business finance, than what has been the traditional mainstream approach in India for years and years.

The normal practice so far has been that to raise capital for starting a business or launch a new product, one project is enacted with all its ingredients — business plan, market research, prototypes, and then approach the banks or financial institutions for funding the project.

Crowdfunding, on the other hand, is raising money through many donors using an online platform, such as Kickstarter, Indiegogo and Crowdfunder, where, through an online platform, fundraiser starts a public campaign for accepting donations. Donation-based crowdfunding, rewards-based crowd funding, equity-based crowdfunding, debt-based (peer-to-peer) are few types of crowdfunding prevalent in India.

In the Indian context, benefits of crowdfunding are evident in its mobilisation ability to tap wider investor pool with flexible fundraising options. Here you increase the reach, improvise on the presentation, develop an indigenous and effective public relations (PR) and marketing strategy, validate your concept, enhance efficiency and finally be more confident in implementing your concept at the ground level.

Risks galore

Some of the risks involved are default, platform closure / failure, fraud, illiquidity, cyber-attack, lack of transparency and disclosures, money laundering, security risk of cross border transactions and accounting audits.

The consultation paper

Securities and Exchange Board of India (Sebi) has come up with a ‘Consultation Paper on Crowdfunding in India’ proposing a framework in the form of crowdfunding to allow startups and Small and Medium Enterprises (SMEs) to raise early stage capital in relatively small sums from a broad investor base.

Crowdfunding, if introduced and regulated, will allow startups in raising capital in addition to the recently introduced Institutional Trading Platform (ITP), which is proposed to provide a cost effective and efficient method of fund raising.

Some vital elements of this framework include recognition of the crowdfunding portals, its oversight and regulation, no role in vetting of the private placement offer (PPO) letter of the issuing companies, issuance of guidelines / circular regarding information required to be disclosed in PPO letter or on an ongoing basis or requirements of due diligence and  screening or any other matter and conduct  periodic inspections of crowdfunding platforms and enforcement of the crowdfunding regulations.

Need for accredition

In addition, Sebi has proposed to allow only accredited investors to participate in crowdfunding such as Qualified Institutional Buyers (QIBs), companies incorporated under the Companies Act of India, with a minimum net worth of Rs 20 crore, High Net Worth Individuals (HNIs) with a minimum net worth of Rs 2 crore, and eligible retail investors.

The technical startups will benefit the most from this new class of analyse-before-investing. Earlier, most crowdfunding was through small donations from individuals who invested because a friend had recommended or they felt for the project. A QIB will prefer to stay away from investing in a project where the risk element involved is higher. Sebi has proposed, that a minimum of 5% of the total number of shares of the company shall be held by QIBs. The number of investors has also been limited to 200 except QIBs (on which there is no limit).

In addition, the company must not be a subsidiary or related to any other company which has a turnover in excess of Rs 25 crores. It must not be listed on any of the exchanges.
Sebi proposes to limit the entities which can establish portals to stock exchanges, depositories, technology business incubators (TBIs) and angel investors. The lopside is that internet should not have been left out by Sebi, as crowd sourcing is mostly done online and letting the existing internet companies to carry out their process should have eased Sebi’s work.

Recheck by Sebi

Now that it is learnt from reliable sources that Sebi is giving second thoughts on proceeding with the final regulations on crowdfunding owing to divergent views from the market and lack of interest for its recently launched startup platform, Sebi also feels that the guidelines being too restrictive in nature may end up having few takers for the proposed framework.

While the concept of crowdfunding is flourishing in the West for three decades now, Sebi still seems to be too concerned on protecting small investors, which may be fine to an extend but not as a deterrent in the wider domain of the benefits of crowdfunding.

Few concerns

In my opinion, there might be few concerns that need to be taken care of as the implementation of the crowdfunding regulations takes place — Sebi shoud actually go ahead with this progressive approach to business and launch the platform to gradually transform into a genuine platform over a period of time.

As an expert points out, “Every new concept emerges because there is a need for it, and for all good concepts, demand grows as people become familiar with the same. Risk never travels alone, rewards are its permanent companion. I am of the view that Sebi as a proactive measure brings some guidelines and allow crowdfunding,” said J N Gupta, founder of SES, a proxy firm.

In my opinion, Sebi should come up with some guidelines on crowdfunding and clear the way for the implementation of the same at the earliest. After all, for how long we will keep shying away from the modern approach to business for the fears of its drawbacks.

(The author is Associate Professor in the Department of Commerce at Delhi School  of Economics, University of Delhi)

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