India Regs Call Startup Lending Practices Into Question

The Securities and Exchange Board of India (SEBI) is placing pressure on the nation’s alternative lending space in a notice issued earlier this month, reports said on Friday (Sept. 9).

SEBI is questioning the legality of equity crowdfunding platforms that startups use to raise funds. Reports said there are several of these platforms in operation today, including Grex, LetsVenture, Equity Crest, Tracxn and Termsheet.

In its notice, SEBI has reportedly told Grex Alternative Investments Market to stop “onboarding” new investors.

“Electronic platforms facilitating fundraising on digital platforms are neither authorized nor recognized under any law governing the securities market,” the note stated. “Such platforms, which are open to all investors registered on the platform, amount to a contravention [of the] Securities Contract Act and the Companies Act.”

The regulator added that only legally recognized stock exchanges can serve as electronic platforms for corporate securities to be listed and traded.

In response, at least one founder of these platforms, Termsheet’s Vivek Durai, said the government needs to support initiatives to help startups.

“If the Modi government is serious about startups, it should ensure that new businesses raising capital or platforms helping them to raise funds are not harassed,” the executive said.

India’s questioning of the legality of such marketplaces may reflect broader sentiment among regulators throughout the world that are beginning to examine the alternative lending industry.

In the U.S., for example, Regulation A+ has come into effect under Title IV of the JOBS Act. The regulation sees the Securities and Exchange Commission allow companies to raise up to $50 million via “mini-IPOs” and allows average individuals to invest in companies and buy into equity stakes.

But U.S. regulators, including the Federal Reserve, are also beginning to look at regulations to heighten control and oversight of the alternative lending space, though potential legislation would be separate from investment activity under Regulation A+.