Chanakya IAS Academy Blog

Notice

Start-up funding may come under SEBI lens

The Securities and Exchange Board of India (SEBI) is concerned with the manner in which start-ups are being funded through unregulated entities and is examining the manner in which alternative fund-raising platforms and crowd-funding ventures can be regulated to bring in transparency and regulatory oversight in such deals.

A panel under T.V. Mohandas Pai, former CFO of Infosys was formed by the regulator recently. The start-up ecosystem has gained significance in India and the government is pushing regulatory bodies to create an investor-friendly ecosystem for such ventures.

Various mandates of the panel:

  • To ensure that market disruption does not come at the cost of investor protection and market integrity
  • The Committee on Financial and Regulatory Technologies will deliberate on financial technology solutions for widening and deepening of the Indian securities market through traditional and alternative platforms, including peer to peer lending and equity crowd-funding

Concerns that were raised recently:

  • SEBI chairman Ajay Tyagi recently met an industry delegation to discuss the matter
  • The regulator was concerned with the increasing number of such entities in the market
  • Even recognized stock exchanges have raised a red flag over the mushrooming of such ventures
  • The regulator has even sent notices to many entities that act as platforms for funding start-ups or connecting them to the large investor community
  • The regulator has questioned the manner in which these entities help start-ups raise funds. Any violation would amount to organizing an unrecognized stock exchange and SEBI would be constrained to initiate action

Existing legal framework:

  • Issue of shares to more than 200 persons constitutes a public issue and needs SEBI approval
  • The cap was increased to 200 from 49 when the Companies Act was revised in 2013
  • SEBI has a provision under Section 28 of Securities Contracts (Regulation) Act, that allows the regulator to recognize such alternative investment platforms
  • Globally there are no uniform standards for registration of such investment platforms, at most places such platforms are regulated trading venues, which serve as an alternative to trading at public exchanges
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