- Everyone has dreams and most of us want our dreams to come true. Similar to big companies, small companies also dream of getting themselves listed on the stock exchanges, but they generally fall short of meeting the eligibility criteria of stock exchanges i.e. BSE/NSE.
- Now Government has recognized the role and importance of the SMEs which have become silent drivers of economic development. The biggest challenge being faced by these enterprises is access to capital.
- To overcome this, almost all major capital markets have realized the need for a separate exchange for SME segment. Many countries now operate separate SME bourses. These markets have tried to create
a SMEfriendly market architecture supported by effective institutions and forging links to policies that foster a new class of investable equities.
- An SME exchange is a dedicated exchange or a trading platform for Small and Medium Enterprises. In India, an SME exchange functions within a recognized stock exchange or the main exchange such as the BSE Limited and the National Stock Exchange of India.
- The framework for setting up of SME exchanges was first propagated by SEBI in 2008. However, a major step in this direction was the report by the Prime Minister’s Task Force in January 2010 on Micro, Small and Medium Enterprises, which recommended setting up of SME exchanges to promote inflow of equity capital in this sector. Subsequently, in 2012, the BSE SME and NSE Emerge platforms were established.
- SME listing not only provides benefits to the companies but also benefits its investors, both existing and proposed, such as providing an exit route to private equity investors as well as liquidity to the ESOP holding employees. Listing pre-supposes good corporate governance, which results in sustainability and helps generate an independent valuation of the company.
- Listing raises a company’s public profile with customers, suppliers, investors, financial institutions and the media and provides continuing liquidity to the shareholders.
Eligibility Criteria for SME IPO
1. Max Post Issue capital – Rs.25 crores
2. Min No. of members for Issue – 50
3. After listing, no min no. of members required to be continued
4. Market making – Mandatory for 3 years
5. Underwriting – 100% (Merchant Bankers to underwrite 15% in own account)
6. Minimum application and Trading Lot size – Rs.1,00,000/- or in multiples
• Net Tangible assets of at least Rs.3 crores as per the latest audited financial results
• Net worth (excluding revaluation reserves) of at least Rs.3 crores as per the latest audited financial results.
• Track record of distributable profits in terms of sec. 123 of Companies Act, 2013 for at least two years out of immediately preceding three financial years and each
financial year has to be a period of at least 12 months. Extraordinary income will not be considered for the purpose of calculating distributable profits.
Net worth shall be at least Rs. 5 crores.
• The post-issue paid up capital of the company shall be at least Rs.3 crores.
• The Company shall have a website
• The company shall mandatorily facilitate trading in
demat securities and enter into an agreement with both the depositories.
• There should not be any change in the promoters of the company in preceding one year from date of filing the application to BSE for listing under SME segment.
Certificate from the applicant company / promoting companies stating the following:
• The Company has not been referred to the Board for Industrial and Financial Reconstruction (BIFR).
• There is no winding up petition against the company that has been accepted by a court.
Note: Cases, where a company is out of BIFR, are allowed.
Listing Process will also involve
to the registered office of the Company by BSE officials to verify general documents and processes followed in the Company.
• Promoters to attend an interview with the Listing Advisory Committee.
Migration from BSE SME Exchange to the main Board of BSE:
• It is mandatory for the company to be listed and traded on the BSE SME Platform for a minimum period of two years.
• Post issue capital should be more than Rs.10 crores and
upto Rs.25 crores.
• Shareholders’ approval to be sought by special resolution passed through postal ballot – In postal ballot, the votes cast by shareholders other than promoters in
favour of the proposal to migrate to Main Board should be at least two times the number of votes cast by shareholders other than promoter shareholders against the proposal to migrate to Main Board.
• To fulfill the eligibility criteria for migration to Main Board – The companies seeking migration to Main Board of BSE should satisfy the eligibility criteria as specified in 26 of SEBI (ICDR) Regulations, 2009 either at the time of initial listing on SME platform or at the time of seeking migration to Main Board. However, same will not be applicable where the company had sought
listing on SME platform by following the book building process and as per the requirements prescribed in 26(2) of SEBI (ICDR) Regulations, 2009.
The 5 P'S of Listing Process on SME
- Planning: The Issuer Company consults and appoints the Merchant Banker/s in an advisory capacity.
- Preparation: The Merchant Banker prepares the documentation for filing after: -conducting due diligence regarding the Company i.e checking the documentation including all the financial documents, material contracts, Government Approvals, Promoter details etc. -and planning the IPO structure, share issuances, and financial requirements
- Process: Application procedure:- Submission of DRHP/Draft Prospectus – These documents are prepared by the Merchant Banker and filed with the Exchange as well as with SEBI as per requirements.
Verification & Site Visit –BSE verifies the documents and processes the same. A visit to the company’s site shall be undertaken by the Exchange
official . ThePromoters are called for an interview with the Listing Advisory Committee. Approval –BSE issues an In Principleapproval on the recommendation of the Committee, provided all the requirements are compiled by the Issuer Company. Filing of RHP/Prospectus –Merchant Banker files these documents with the ROC indicating the opening and closing date of the issue. Once approval is received from the ROC, they intimate the Exchange regarding the opening dates of the issue along with the required documents.
- Public Offering: The Initial Public Offer opens and closes as per schedule. After the closure of IPO, the Company submits the documents as per the checklist to the Exchange for finalization of the basis of allotment.
- Post Listing: Exchange finalizes the basis of allotment and issues the Notice regarding Listing and Trading. Other Requirements:
- The Company shall have a website
- The company shall mandatorily facilitate trading in Demat securities and enter into an agreement with both the depositories.
- There should not be any change in the promoters of the company in preceding one year from date of filing the application to BSE for listing under SME segment.
Listing Process will also involve
tothe registered office of the Company by Exchange officials to verify general documents and processes followed inthe Company.
- Promoters to attend an interview with the Listing Advisory Committee.
- Submission of DRHP/Draft Prospectus – These documents are prepared by the Merchant Banker and filed with the Exchange as well as with SEBI as per requirements.
- Verification & Site Visit – Exchange verifies the documents and processes the same. A visit to the company’s site shall be undertaken by the Exchange
official . ThePromoters are called for an interview with the Listing Advisory Committee.
- Approval – Exchange issues an
In Principleapproval on the recommendation of the Committee, provided all the requirements are compiled by the Issuer Company.
- Filing of RHP/Prospectus – Merchant Banker files these documents with the ROC indicating the opening and closing date of the issue. Once approval is received from the ROC, they intimate the Exchange regarding the opening dates of the issue along with the required documents.
- Easy access to capital: Platform provides an avenue to raise capital through equity infusion for
- Enhanced Visibility and Prestige: The SME’s benefit by greater credibility and enhanced financial status leading to demand in the company’s shares and higher valuation of the company.
- Encourages Growth of SMEs: Equity financing provides growth opportunities like expansion, mergers
andacquisitions thus being a cost effectiveand tax efficient mode.
- Enables Liquidity for Shareholders: Equity financing enables liquidity for shareholders, provides growth opportunities like expansion, mergers
andacquisitions, thus being a cost effectiveand tax efficient mode.
- Equity financing through Venture Capital: Provides an incentive for Venture Capital Funds by creating an Exit Route and thus reducing their
- Efficient Risk Distribution: Capital Markets ensure that the capital flows to its best uses and that riskier activities with higher payoffs are funded.
- Employee Incentives: Employee Stock Options ensures stronger employee commitment, participation and recruitment incentive.
- Wealth Maximization: not only promoters’ wealth but shareholder’s wealth also maximize.
- Space for additional Capital: through private placement, right issue, preferential placements etc.
- Brand Value: Listed entity, Bigger Brand Now
Bank Finance v/s Equity Raising
- Practically a borrower repays Rs100 cumulative as finance charges in 7 years on Rs. 100 borrowed from
- Rs100 still need to repay as and when bank demands.
- Prime and Collateral security needed.
- Guarantor required.
- Annual review/renewal procedures to follow.
- Interest is an obligation.
- NPA guidelines.
- Bank’s discretion & decisions vary with