Mixed comments by concerned parties over the proposed crowdfunding norms have ruled out the possibility of the Securities and Exchange Board of India (Sebi) coming out with the final guidelines anytime soon. Reluctance to allow crowdfunding via social networking sites, challenges of liquidity, the proposed investment cap on the retail investors and allowing promoters to hold low stake, are some of the issues raised by the market observers.

“The final crowdfunding guidelines are unlikely to be issued even in the next quarter as Sebi has received mixed comments over its consultation paper,” said a source.

The proposed investment limit of Rs 60,000 for retail investors has polarised market observers. Nitesh Mehta, associate director at Walker Chandiok & Co, believes that retail investors would be better off investing such small amounts in a public provident fund (PPF) or Mutual Fund for decent returns at low-risk.

At the other end of the spectrum, Kaushik Mukherjee, partner at J Sagar Associates feels the retail investors should be ideally kept out of it due to the high-risk nature of funding start-ups. “You can’t expect the same level of due diligence in such products as is customary to main market listings which are marketed to retail investors as that would defeat the very purpose of the product, designed to provide start-ups with a quick, inexpensive and efficient investment route,” Mukherjee added.

As per the proposed norms, the issuing start-up needs to only disclose a description of financial condition of the company, including audited financial statements of a year in the private placement private offer.

Taking a neutral view, Kalpana Jain, a senior director at Deloitte India, believes the cap is to protect the retail investor and it can be tweaked later depending upon how the platform performs under the regulatory regime.

The consultation paper has defined entities that can set up the crowdfunding platform, but has excluded social networking sites on account of ‘higher chances of information asymmetry’ on such sites. However, Mukherjee feels there could have been some proposals to allow social networking sites to set up crowdfunding platforms so that a pre-existing investor-base, which would otherwise be largely inaccessible, can be tapped.

Another concern raised is the lack of liquidity for the securities issued through crowdfunding. The consultation paper states that investors may get to exit only when there is sale of the company, a management buyout or a floatation of an IPO or listing. An investment banker says there could be a provision which allows a market-maker to provide liquidity to the counter. Mehta at Walker Chandiok & Co says that retail investors can sell on Sebi’s recognised platform, but the buyer would also be worried about lack of liquidity.

The proposed norms say that promoters need to hold a minimum of 5% stake in the company for at least three years from the issue, which market experts feel is inadequate. “Since start-ups are largely promoter driven, that percentage may be kept at a slightly higher level to ensure the promoters continue to evince sufficient interest in the venture,” Mukherjee said.

Another norm which has got mixed reviews is the 5% minimum allotment to qualified institutional buyers (QIBs). Jain from Deloitte believes while the norm is against the pure concept of crowd-funding, the intent is to give a source of comfort to marginal investors.

Mukherjee at J Sagar Associates is of the view that the QIB quota should be raised to 10% as it would demonstrate that the investment opportunity is robust. “By a recent amendment to the ICDR regulations, the minimum allotment to QIBs in an IPO has been raised to 75% if a company doesn’t have adequate track record,” Mukherjee says.

Crowdfunding operators say the changes can be made once Sebi tests the water with its regulations.

“Certain restrictions are needed for equity-based crowdfunding. However, regulations are a step in right direction. The restrictions are necessary to protect the investors. Once the current regulations are in force, Sebi could relax some norms, may be after two years if the platform runs smoothly,” said Anshulika Dubey, co-founder of the reward-based crowdfunding platform Wishberry.

The article appeared in the Financial Express. The article can be found here.