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What Is Grex?

Published on Fri, Feb 19,2016 | 23:09, Updated at Mon, Feb 22 at 18:24Source : CNBC-TV18 |   Watch Video :

What do you get when you marry Start Up India with Digital India with SEBI’s revamped institutional trading platform? Well, it’s called GREX and its Co-Founder & CEO Manish Kumar is here to talk about this ‘exchange-like platform’. Also, joining CNBC TV18’s Menaka Doshi is Sandeep Parekh of FinsecLaw to critically evaluate GREX…

Doshi: You have got a couple of minutes to describe to us what this product is.

Kumar: A start-up or any company goes through a huge journey from the incubator phase to an initial public offering (IPO) phase. Now it is not only sufficient that you do a lot of work on the incubation side and then we will leave the companies in the lurch. That was the journey part that prompted us to do something about helping companies all along the way from incubator to IPO.

Doshi: What does GREX do?

WHAT IS GREX?

Exchange like platform
Seeks to bring together high growth unlisted companies & eligible investors
 
Source: Company presentation

WHAT IS GREX?
 
Opportunities for primary capital raising & secondary market transactions
Offers information on unlisted companies & transactions in unlisted equity, debt…
 
Source: Company presentation

Kumar: What we do is from the companies side, we are a platform that basically helps all the participants of the financial services sector and the companies to come together and do their bit. So from the company side, companies can now come on GREX, be there, share information as they go along and keep raising capital by private placements as they go along in the journey.

Doshi: So you allow both primary raises and secondary transactions?

Kumar: For the private investors who would be investing you cannot have a very large scale private placements without giving them exit options. So what we have provided for is an exit option by way of secondary transactions, which are not trading transactions, which are still value exits, which are still something that you post.

Doshi: Which are not trading transactions in the sense?

Kumar: We all know in our general parlance is real time trading matching etc. How about moving it to one month?

Doshi: That is where you escape the regulatory bit, right? Because it is not real time trading. On the regulatory case for an exchange like platform for unlisted companies like GREX is, is it legitimate?

Parekh: I certainly affirm that we need alternative products and 15 years back we had a Securities and Exchange Board of India (SEBI) paper which looked at alternate exchanges like we have in Electronic Contract Note (ECN) in the West. At that stage, SEBI did not go ahead with ECNs.

Doshi: Time is ripe now.

Parekh: The second thing which SEBI has done over the past three years is peer-to-peer, which is not similar to this but somewhat similar to this in which people meet in an exchange kind of a platform. The third is another west model of big boys market. There is an example called portal which Nasdaq runs. So clearly, there is a need for all three of those in India and we have a very structured monolithic exchange or nothing at all.

So having informed the need for this, I think two basic legal questions which I have. The first is the primary placement, which is company's law -- it is not SEBI law -- says you cannot make an offer to more than 200 people. Unless you are able to restrict the entire audience of your investors to 200, how do you get around that?

Kumar: That ensures that this law is followed.

Doshi: Because you have got a strict accreditation process for investors to come on to the website.

Kumar: That is one part but by using a system you can never go beyond 200 anyway. The system ensures that.

For example, to begin from there, PAS-5 required to be filed. So what are the things that we ask companies when they initiate -- so when the company is initiating a private placement process, primary capital as we call it, so one of the things that they have to upload is their last uploaded PAS-5 which tells us the number they have already reached in this financial year. So you cannot breach that even if you want to. That takes care of the compliance part, in fact enhanced compliance part.

Parekh: The law says you cannot make more than 200 offers, not more than 200 allotments. So are you making 200 offers or are you making fewer than 200?

WHAT IS GREX?
 
Companies Act, 2013
Section 42: Private Placement
‘…means any offer of securities or invitation to subscribe securities to a select group of persons…through issue of a private placement offer letter…’

Kumar: The interesting part is what is an offer and there have been some cases around that and that is precisely where the legal world has one opinion. If you see Chapter 3 section 42 part II, which talks about private placement means any offer of securities or invitation to subscribe securities to a select group of persons by a company through issue of private placement offer letter. So, me talking to you about my company is not private placement or an offer.  A technical offer, which is written clearly in law and not set to interpretation by central government or anybody else is only through issue of private placement offer letter.

Doshi: So you can send the letter out to 200 people and not more but you can talk to more than 200.

Kumar: Yes, so the whole idea is you can tell anything about your company.

Doshi: Are you convinced that this is not going to fall foul of regulation?

Parekh: I think it is a matter of interpretation.

Doshi: You have been talking to SEBI, right? What has SEBI said about -- we are not criticising it, like Sandeep Parekh said, we need more such platforms in the country but what has SEBI said on whether you are on the right side of regulations or not?

Kumar: Difficult one so far. So SEBI has been trying to understand us in the first place. We have not had too many interactions that they understand GREX -- the whole process. You have to understand the paradigm, the need and the processes and not just this part. So we are very hopeful, we are looking at SEBI with the hope that whatever is unsaid part in the law probably SEBI will come more clearly.

But they know that these provisions are what we are invoking, we have made our submissions to them, they are studying the matter as of now. What we have been told, nonetheless, is the regulator is positive towards innovations happening.

Doshi: How many investors do you have currently that are using the platform, how many start-ups do you have that have used the platform as yet, how much money have you been able to facilitate in terms of capital raised and secondary transactions?

WHAT IS GREX?
 
Platform Process For Companies
- Online Registration
- Upload Company PAN, Board Resolution & Certificate of Incorporation
- Upload relevant resolutions, approvals, executed Participant Company agreement, Sponsor engagement document, diligence documents
- Upload executed dematerialization & Full Registry agreements, POA
- Create offer details
 
Source: Company presentation

WHAT IS GREX?
 
Platform Process For Investors
- Verification of KYC
- Verification of bank account & demat account details
 
Source: Company presentation

Kumar: There are various stages of companies, it is a fairly rigorous process. What we did at GREX was we made -- what we call going live at GREX --very rigorous. From the first registration, we have around 550 companies onwards and only three live. Now on the investors' side -- so in total the number at various stages will vary from 1,000 investors on the process and 100 completed the process.

Doshi: So today 100 investors can technically invest using your exchange like platform in the three companies that you currently have cleared?

Kumar: Yes. The first proof of pudding, the first operational case happened in October. Till that time, we had not opened up to the market. After that we have opened up to the market. The second company is raising capital now.

Doshi: How much capital did the first one raised?

Kumar: Rs 1.5 crore. It was oversubscribed.

Doshi: So we have both the regulatory case and the business case.

Parekh: Section 19 of SCRA talks of an exchange so how are you different from an exchange?

WHAT IS GREX?
 
SCRA
Section 19: Stock exchanges other than recognised stock exchanges prohibited

No person shall, except with the permission of the Central Government, organise or assist in organising or be a member of any stock exchange (other than a recognised stock exchange) for the purpose of assisting in, entering into or performing any contracts in securities

Kumar: That is where the interpretation from SEBI has to come out. Section 19 is -- from where we would see that talks about anything that you do with securities under the sun. If I and you talk securities, we are an exchange. That is how section 19 has been worded and anything that is an exchange and not approved is illegal therefore, which means Mumbai Indians is illegal, which means all the investment bankers are illegal, which means everything is illegal.

Doshi: That’s your reading of it. I don’t think that’s everyone’s reading of that section. How are you in compliance with the section?

Parekh: Very different.

Kumar: Nobody can be in compliance with that section which means that everybody is outlawed so we cannot be in compliance. There is deficiency in the law itself, that does not mean that we don’t need to be in compliance.

Doshi: Which is what you are trying to talk with SEBI about.

Parekh: It will work fabulously but obviously there has to be a regulatory framework, which is missing. So, I think it has to come pretty quickly for this to succeed otherwise they will live under a haze for the next three-four years.

Doshi: That could hurt their business case as well?

Kumar: Because that is what we have given cases to SEBI also because the SEC is moving fast. You have got to make us competitive as well.
 
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