India eases rules on entrepreneurs’ post-IPO lock-up
India has altered rules concerning the lock-up on entrepreneurs’ shares post-IPO in order to make it easier for companies to list. This is expected to support companies that go through several stages of private equity funding.
The Securities and Exchange Board of India (SEBI) requires promoters to retain at least 20% of the shares in a company for three years. This is designed to ensure that they have sufficient incentive to stay with the company, rather than departing with their profits and leaving the stock to flounder, at a cost to public market investors.
However, in situations whether there is also private equity involvement in companies, the promoter stake sometimes falls below 20%, presenting a potential obstacle to listing. SEBI has responded by allowing registered private equity and venture capital investors to put up 10% of the holding, The Business Standard reported.
Previously, the regulator made exceptions on a case-by-case basis, notably in 2010 with SKS Microfinance where Sequoia Capital, Sandstone Capital, Kismet Capital and SKS Trust took on the mantle of promoters because the founder's stake came to just 6%.
"To encourage professionals and technically qualified entrepreneurs who are unable to meet the requisite 20% contribution by themselves, promoters will be allowed to meet the same with the contribution of SEBI-registered alternative investment funds such as SME funds, infrastructure funds, PE funds, VCFs (venture capital funds), etc, subject to a cap of 10%," SEBI said in its press release.
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