Sebi puts crowd funding regulations on the back burner

The crowd funding regulations proposed by market regulator Securities and Exchange Board of India (Sebi) nearly a year ago have gone into cold storage, said sources with the knowledge of the development.

"The thinking within Sebi is introducing norms on crowd funding for the Indian market would be pre-mature as no other jurisdiction currently has a regulated crowd funding market," said a source.

The other important reason, for shelving crowd funding norms for the time being, is that issue of getting a handle and treatment of cross-border investments.

"As the platform will be online there will be overseas investment and transactions. There isn't enough clarity on how that can be treated," said the source.

In June last year, Sebi had issued a discussion paper on crowd funding to provide entrepreneurs with an additional avenue of raising capital. The proposed framework allowed capital raising from individuals using internet-based platforms and social media

Typically, young entrepreneurs and small groups of people use this route for their ventures by spreading the word through their social network.

After putting up the discussion paper in public domain for feedback, Sebi received a host of representations from various market participants. Some of the comments highlighted that there is a need for more detailing and the issue hasn't even been addressed by some of the advanced economies.

"The issue of crowd funding has been discussed in detail by the International board of Sebi. A lot of advanced economies have not yet delved into the subject yet," said another source.

People in the know said, Sebi might act on the crowd funding norms after some regulator experiments tests the crowd funding regulations.

Sebi in the meanwhile is in the process of finalising the norms of capital raising for start-ups, which will allow firms, especially in the technology space raise equity capital under a separate trading platform.

Experts said once Sebi introduced the listing norms for start-ups, the need for a crowd funding framework might diminish.

The Sebi discussion paper also met with its fair share of criticism. One such criticism was that it categorised crowd funding as 'solicitation of funds from multiple investors through a web-based platform or social networking site for a specific project, business venture or social cause, which would have acted as a facilitator for angel investors."

In the discussion paper Sebi had also proposed that, crowd-funding platforms can be provided by only registered entities, while companies can raise up to Rs.10 crore in a year through this route.

Given the high-level of risks associated with this new way of fund-raising activity, Sebi had also proposed that only 'accredited investors' be allowed to participate in crowd-funding activities.