SME listing: A small step to a big future
Sakshi Agarwal January 7, 2020
Sakshi Agarwal, chief mentor and leader, corporate secretarial and legal, Plural Solutions. Sakshi is also an associate member of the Institute of Company Secretaries of India and a qualified Lawyer.
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Small and medium enterprises (SMEs) play a major role in economies around the world and are major contributors to the employment, export, gross domestic product (GDP) of any country. The SME sector in India, that currently employs over 111 million people, contributes around 29% to the country’s GDP and accounts for 50% of the total exports.. . However, access to capital is a key constraint to the SME growth. In order to address the fund-raising concerns of this set of businesses and enhance their brand visibility and growth, in 2010 SEBI laid down framework for setting up a stock exchange/ trading platform dedicated to SMEs. Around 310 SMEs have been listed on the SME platform of Bombay Stock Exchange. According to the BSE SME website, the SMEs with total market capitalization of INR 8203.38 crore have managed to raise around INR 3183.80 crore from the market till data. Of the total companies listed so far, around 71 companies have even migrated to the main board.
Since more and more small companies may look into listing themselves on the stock exchange, it is important to understand the criteria for listing. A company desiring to get listed on the stock exchange shall :
- be incorporated under the Companies Act, 2013 or erstwhile Companies Act,1956
- the post issue paid up capital of the company (face value) shall not be more than INR 25 crore; have a positive net worth; and net tangible assets should be INR 3 crore
- the company or the partnership/proprietorship/LLP firm or the firm which have been converted into the company should have a combined track record of at least three years.
- Or in case it has not completed three years of operations then it should have been funded by way of loan/equity by banks/financial institutions/central or state government; or its undertaking/or group company should have been listed for at least two years either on the main board or SME board of the nationwide exchange.
- the company or the entities or the entities which have been converted into the company should have combined positive cash accruals (earnings before depreciation and tax) from operations, and its net worth should be positive. And, it shall have a website.
- 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 the SME segment.
How to list on SME exchange
As part of the listing process, the company needs to appoint a merchant banker , who will conduct due diligence and prepare the initial public offering (IPO) structure. Post that, the banker will file the draft red herring prospectus in the prescribed format with BSE and the capital markets regulator Securities and Exchange Board of India (SEBI). The stock exchange will then send a personnel for verification of the company’s office, and the promoters are called for an interview with the listing advisory committee. Based on recommendations of the committee, an in-principle approval is given by the stock exchange and on filing of the requisite documents with the Registrar of Companies (ROC), the issue shall open. On the receipt of money, the documents are filed with the exchange for finalization of the basis of allotment. BSE, then, issues the notice regarding listing and trading.
Migrating to the main board
In fact, the company – whose specified securities are listed on the SME exchange and whose face value capital is more than INR 10 crore – can migrate to main board after a period of two years from the date of listing on the BSE SME platform. The migration can only happen by passing a special resolution and if the company fulfils the listing norms laid down by the main board. As mentioned above, around 71 SMEs have already migrated to the main board successfully.
Why SME IPO may be a good choice
The major benefits that accrue from listing on the stock exchange include:
a) Expanding the financing option: SMEs can get easy access to an interest-free capital that can be used for expansion of their businesses. This will cut down their over dependence on debt, wherein they are required to mortgage resources and also bear the high interest cost..
b) Enhance the visibility: The listing enhances the visibility of these companies as their securities are publicly traded. Often these companies move to the main board; and the timely disclosures as mandated by the government enable the shareholders in having a complete track record of these companies – thus, boosting investor confidence.
c) Exit option: Several private equity players and other institutional investors, who had invested at an early stage of the company, get an option to take an exit from the company at the time of listing, at good valuations.
d) Incentives for employees: Often these companies provide the shares in the form of employee stock ownership plan (ESOP) or sweat equity to its employees. The listing allows employees to get a good valuation for the shares they hold in the company, in addition to making them feel more closely associated to the organization.
e) Good governance: Disclosures of material information/financial information/and non-financial information, that includes major deals, losses in any unit, transactions between the management or related parties, help in checking any diversion of funds as well as make these companies better managed and complied.
f) Migration to the main board: On the achievement of the capital of INR 10 crore and completion of two years on the SME exchange, companies can easily migrate to the main board of the BSE.
There are many stories on companies such as Suyog Telematics, SRG Housing Finance, Yash Chemex that are successfully trading now. SME listing is a very good option of raising funds by small enterprises.However, they should keep in mind that the money invested has to be used in an ethical and vigilant manner, as timely disclosures and reporting create a brand image as well as bring them under a lot of scrutiny from the authorities. And it is the track record that is created here will be looked upon at the time of the company going for listing on the main board.