SEBI has come out with a proposal to set up an Alternative Capital Raising Platform that will enable startups in India to list on a separate and regulated stock exchange. We're discussion what this ACRP is, the good stuff and the not-so-good stuff about it

1. Stock Market Listing
For Start-ups
Jaydeep S. Halbe 9th April 2015

2. SEBI’s Aim
SEBI (Securities and Exchange Board of India) is the government body
that controls the stock market.
In Early 2015, SEBI floated a discussion paper on creating a listing
platform just for start-ups.
The aim of SEBI in doing so is believed to be two-fold:
1) Provide entrepreneurs with a new avenue which will give them
access to capital.
2) Provide Angels and VCs with an exit opportunity from the company.
In the next couple of slides, we will discuss these two aims and also
whether stock market listing is a good idea for a start-up or not.

3. Angel / VC Investment
When you pitch your start-up to an angel investor or VC (Venture
Capitalist), they evaluate your idea on the following criteria:
1) Possibility of business scaling rapidly
2) Ability of the founding team to achieve scale
3) How sound the business model is
4) Is the product / service offering sound and better than the rest
5) How and when an exit can be provided by the entrepreneur
An Angel or VC is in the business of investing money in start-ups and
multiplying the value of his investment by helping the start-up grow /
scale through the funding providing and also leveraging their contacts.
An Angel / VC wants a 5X or 10X return on their investment at the end of
a 3 – 5 year period. They are not concerned about Dividends.

4. Angel / VC Exit
An Angel / VC has invested in your start-up with the aim of multiplying
the investment and getting 5X or 10X return. This return, in reality will
accrue to the angel / VC only if one of these happen
1) Start-up sells it’s business entirely to another player (Acquisition)
2) Start-up raises a further round of funding.
If an investor has invested in Funding Round 1, the earliest he can exit is
at Funding Round 3. The exit always comes T+1 round because if the
Investor exits in the very next round, it makes further funding impossible
for the company because it sends a wrong signal in the market.
This is why investors look at scalability because if you don’t scale your
business, you don’t need further funding and if you don’t need further
funding, the investor can’t exit!

5. SEBI’s - ACRP
Alternate Capital Raising Platform is what the SEBI is calling the start-up
listing platform.
Who can use?
1) All companies in software product development and e-commerce
2) Any new-age company having an innovative business model
Who can invest on ACRP?
1) Qualified Institutional Buyers (QIBs) – 75% of the offering
2) Non-Institutional Investors (NIIs) Individuals – 25% of the offering
Quantum?
1) Company must do a minimum fund raising of Rs. 10 Lacs
2) Shares must be allotted to at least 500 people.
3) No QIB can hold more than 5% of the issue size

6. ACRP vs. Regular Stock Market
When a company lists on the regular stock market, ICDR regulations are
followed. ICDR – Issue of Capital and Disclosure Requirements. ACRP
intends to have some amount of relaxations when compared to existing
ICDR regulations.
Particulars Existing Proposed
Promoter /
Founder Lock in
period for shares
Promoter must hold 20% of
post issue capital for 3 years
Promoters must hold on to
their pre-issue share capital for
6 months
Determining /
Providing Issue
Price to Investor
Based on Earnings per share
(profit), Average return on
net-worth
Based on Projections and any
other material chosen by the
start-up
Purpose of Raising
Funds
Disclose what project money
is required for and provide
details of the project in full
‘General corporate Purpose’ is
a more than adequate purpose
for which funds are needed.
Minimum Trade
Value
1 share of Re. 1 can be
purchased
Rs. 500,000. Exception for
employees selling Sweat Equity
Shares

7. ACRP – The Good Stuff
1) It’s great that the SEBI is acknowledging start-ups by going to the
extent of setting up something like ACRP for fund raising.
2) By keeping the minimum trade value to be Rs. 500,000 SEBI is
trying to ensure that only investors with large appetites are active on
the ACRP because the risk perception of the companies is high.
3) By reducing / bringing down the lock period requirements, it’s
enabling a larger number of companies to list on ACRP because in
today’s day and age, the founders of a heavily funded start-up
seldom have 20% equity.
4) By saying that share price need not be determined based on
Earnings Per Share (Profit) but actually based on projections, the
SEBI is taking into account that a start-up making losses need not
necessarily be valued lower than a start-up that’s profitable.

8. ACRP – The Not-So Good Stuff
1) SEBI’s made it easier, but listing on ACRP is still not a cake walk.
Sure the restrictions are lower and the requirements are easier to
fulfil, but you’ve still got to jump through a million hoops.
2) Allowing shares of your company to be listed on ACRP means they
are going to be traded. Trading always gives rise to speculation. That
means you’ve got to ensure no news about your company that is
even remotely negative hits the market because that’s going to mean
a massive speculation selling.
3) As a start-up, share price fluctuations and loosing or gaining a
couple of million dollars on paper on an hourly basis is not
something you want to spend time getting worried about. You’ve got
bigger fish to fry.
4) Answering the 4 investors you have on board and answering an
Annual General meeting (AGM) with 400 investors is poles apart.

9. Conclusion
Kudos to SEBI for coming out with something like ACRP for start-ups.
This is the government’s effort to try and persuade the Flipkarts and
Snapdeals of the Indian Start-up Ecosystem to consider an Indian Listing
rather than listing in Singapore or the US.
But, what one must understand is that listing on a stock exchange (even
if it’s ACRP) is a whole different ball game and is not for everyone. It
depends on what stage your company is at. If you can raise the same
amount of money through a few investors, it’s always preferable. It boils
down to answering 4 people as against 400 people!
ACRP is still in the discussion stage and public comments are being
welcomed. Write to capitalraising@sebi.gov.in if you’ve got something!
Full Discussion Paper:
http://www.sebi.gov.in/cms/sebi_data/attachdocs/1427713523817.pdf

10. Thank you!
If you’d like to know more, have comments,
feedback, suggestions, please write to me:
jaydeep@halbeinnovations.com
Special Thanks: Mridhulaa Natarajmurthy
Disclaimer: The opinions stated in this slidedeck are my own individual opinions and are subject
to interpretation.