SME Listing: A prudent way to augment funds

 

MSME is the backbone of the economy of any country. Be it contribution to GDP or employment generation, no country can afford to ignore MSME. Table 1 shows contribution of MSME of top ten countries in GDP and employment in %

Table : 1 Contribution of MSME in GDP and Empoyment

Sr No	Country	GDP (%)	Empolyment(%)
01	India	30	60
02	China	60	79.6
03	USA	46	47.5
04	Brazil	27.5	54.2
05	Japan	50	69.7
06	Germany	35	60.1
07	UK	50	60
08	France	30	61.4
09	Italy	68	78.5
10	Canada	40	69.7

Note : Data Year 2020 : Sr No 01

            Data Year 2019: Sr No 05 to 10

            Data Year 2018: Sr No 02,03 and 04

Therefore it becomes imperative for any country to strengthen their MSME sector.

In India, one of the impediments that hampers the competitiveness of the SME Sector is access to finance and cost of augmenting finance. Rate of Interest charged by commercial banks is too high to adversely affect their cost sheets.

The Government of India in order to provide a solution to the problem of access to finance had set up a task force (2010). The task force had recommended the setting up of a dedicated Stock Exchange/ Platform for SMEs where IPO’s of small and medium companies can be launched.

SEBI (Issue of Capital and disclosure requirement-ICDR) regulation 2018 defines SME Exchange  means a trading platform of a recognized stock exchange having nationwide trading terminal permitted by the board to list the specified securities issued in accordance with chapter IX and includes a stock exchange granted recognition for this purpose but does not include the Main Board. To this initiative, in 2012, the Bombay Stock Exchange and the National Stock Exchange established separate exchange platforms for SMEs, called BSE SME and NSE EMERGE respectively.

Earlier, OTCEI (Over the counter Exchange of India) was launched with similar objectives, however since that could not become popular hence the same was dissolved in 2014.

Here is some Interesting data in relation to India:

• There are 6.33 Crores SMEs in India.
• There are approximately 300000 SME that report profit in excess of Rs Five Crores.
• There are 20000 Large Companies and out of these large companies approx 25% ie 5500 companies are listed. Whereas only 900 SMEs is 0.3% are listed as of now. 

 Benefits :

1. Unlock 10x,20x, 50x  or even 100x Your Value with Fundraising.

2.  Attract Premium Suppliers, Customers & Talent

3.  Boost Your Visibility and Recognition    

4. Easy access to capital and future Financing Opportunity.

5.      Liquidity for Shareholders/Investors.

6.      Employee Stock Options.

7.      Tax Benefits.

8.      Strengthening of Governance and Internal Control

9.      Migration to Main Board

Success Stories:

1. DroneAcharya Aerial Innovations Ltd (December 2022):

• This company manufactures and supplies drones for various applications, including agriculture, surveillance, and mapping.
• Their SME IPO got subscribed a staggering 243.7 times, showcasing strong investor interest.
• The share price rose by over 187% on the listing day, highlighting a successful outcome for the company and its investors.

2.    Annapurna Swadisht Pvt Ltd (December 2022):

• This company manufactures and distributes a popular brand of packaged sweets and snacks in India.
• Their SME IPO received an overwhelming subscription of more than 150 times, reflecting investor confidence in the brand's potential.
• The share price witnessed a significant increase of over 87.5% on the listing day, indicating a positive outcome for the company.

3.    Phantom Digital Effects Pvt Ltd (December 2022):

• This company provides visual effects and animation services for the Indian film industry.
• Their SME IPO was subscribed over 150 times, demonstrating strong support from the investor community.
• The share price jumped by more than 85% on the listing day, signifying a successful debut for the company.

4. Mazagon Dock Shipbuilders Ltd (Listing in February 2023):

• This is a prominent defense PSU (Public Sector Undertaking) that went public through an OFS (Offer for Sale) on the SME platform.
• While not a classic SME story of a new company raising capital, Mazagon Dock's listing on the SME exchange signifies the growing importance and potential of this platform for established entities.

5. Recent Trends (as of March 2024):

• Reports suggest that the Indian SME IPO market has witnessed a significant surge in 2023 and early 2024.
• The average return for SME IPOs listed in 2023 reportedly hovered around 80%, indicating strong investor interest and potentially lucrative outcomes for companies that successfully navigate the IPO process.

Note: It's important to note that past performance doesn't guarantee future results. Carefully evaluate individual companies and market conditions before making any investment decisions.

 Table 2 herein below shows the eligibility criteria for BSE SME and NSE Emerge.

Table : 2 Eligibility Criteria for Listing:

Sr No	Parameter	BSE SME	NSE EMERGE
01	Form of Ownership	Incorporated as a company under companies act 1953 or 2013	Incorporated as a company under companies act 1953 or 2013
02	Networth	Positive Networth	Positive Networth
03	Net Tangible Assets	Should be 1.5 Crores	No Such Requirement
	Post Issued Paid Up Capital	Post Issue paid up capital should not be more than 25 Crores.	Post Issue paid up capital should not be more than 25 Crores.
04	Track Record	·    The company or the partnership/proprietorship/LLP Firm or the firm which have been converted into the company should have combined track record of at least 3 years.                                 Or In case it has not completed its operation for three years then the company/partnership/proprietorship/LLP should have been funded by Banks or financial institutions or Central or state government or the group company should be listed for at least two years either on the main board or SME board of the Exchange.	Track Record of three Years of either of : i. the applicant seeking listing; or ii. the promoters****/promoting company, incorporated in or outside India or iii.Proprietary / Partnership firm and subsequently converted into a Company (not in existence as a Company for three years) and approaches the Exchange for listing.  ****Promoters mean one or more persons with minimum 3 years of experience in the same line of business and shall be holding at least 20% of the post issue equity share capital individually or severally
05	Positive EBDT	the company or the firm or the firm which have been converted into the company should have combined positive cash accruals (earnings before depreciation and tax)in any of the year out of last three years	Operating Profit in atleast two years out of three Years.
06	Other	·   It is mandatory for a company to have a website. ·   It is mandatory for the company to 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. ·	·     The applicant company has not been referred to erstwhile Board for Industrial and Financial Reconstruction (BIFR) or No proceedings have been admitted under Insolvency and Bankruptcy Code against the issuer and Promoting companies ·     The company has not received any winding up petition admistted by a NCLT / Court. ·     No material regulatory or disciplinary action by a stock exchange or regulatory authority in the past three years against the applicant company. ·     Issuer seeking listing shall ensure that none of the merchant bankers involved in the IPO should have instances of any of their IPO draft offer document filed with the Exchange being returned in the past 6 months from the date of application. For this purpose, the left lead merchant banker and any other merchant banker if applicable who shall  be responsible for due diligence  activity  and drafting  of the draft offer document / offer document in terms of the Lead Managers' Inter-se Allocation of Responsibilities  shall be considered.

 

Some common Guidelines for Listing of BSE SME and NSE Emerge:

Ø  IPO Grading is not compulsory for listing on SME Exchange.

Ø  Market making mandatory through exchange registered market makers for a minimum period of 3 years.

Ø  The minimum application and trading lot size shall not be less than Rs. 1,00,000/-

Ø  The prospective allottees should be minimum 50.

Ø  The Merchant banker should underwrite 15% and the entire issue shall be 100% subscribed.

Ø  The offer documents (draft prospectus /draft red herring prospectus) shall not be subject to observation by SEBI. Instead, SEBI has delegated its power to stock exchanges.

  Procedure for Listing on MSE Exchanges:

v  Appointment of a merchant banker(MB) who shall be the lead manager of the issue. The merchant banker should be listed with SEBI

v  Appointment of various agencies such as bankers to the issue, Registered Transferring agents, Advertising agencies, depositories etc.

v  The MB shall undertake due diligence. He will ensure that the details of promoters are complete, all government approvals are in place, and the documentation is complete in all respects.  He Shall also shall also include planning the IPO structure, share issuances, and financial requirements.

v  Preparation of Draft red herring prospectus/information memorandum & submit the same with the stock exchange.

v  Approval from the stock Exchange. For the SME IPO, SEBI has delegated its power to stock exchanges. The stock exchange while approval shall conduct complete scrutiny of the submitted documents. The exchange shall also conduct interviews with promoters.

v  Post in principle approval from the stock exchange, the Red Herring Prospectus /Information memorandum shall be filed with the Registrar of Companies (ROC). Post approval from ROC, the issuer shall inform the stock exchange on the opening and closing date of the issue.

v  IPO shall open and close as per the schedule.

v  Post IPO, the company shall submit the documents to the stock exchange as per the checklist for the basis of allotment.

v  After the allotment is over, the company shall file an application to the stock exchange for listing of securities issued.

v  After the receipt of approval for listing from the stock exchange, the company shall initiate for dematerialization of securities with Central Depository Services Limited (CDSL) National Securities  Depository Limited (NSDL)

v  Lastly, the company shall file an application with stock exchange for trading approval

 Conclusion:

Due to its inherent benefits, SMEs as well as Investors are moving towards SME exchanges for their requirement of fund raising/growth opportunities for their investment. Close to 400 & 231 SME companies are listed on NSE and BSE respectively. The process is very simple as compared to main board listing. It offers a very cost effective platform for fundraising for growth and expansions etc. Another very important benefit of listing of SME exchanges is migration to the main board (main platforms of stock exchages) after they cross the prescribed threshold.

                                                --------------------------------

Note : The author provides consultancy in SME IPO. In case you want to avail services you can reach to the author at neerajmehraandco@gmail.com 

 

Flexi CFO Services: Boon For Startups, MSME and Emerging Businesses

                    Flexi CFO a boon to MSME / Startups/ Emerging businesses

 

In the initial phases of a startup or business, the primary attention is given to business/market development, while crucial aspects like compliance, internal control, financial control, etc. are often neglected.

In numerous instances, this becomes the primary cause for startup failure or business closure, despite a highly favorable economic environment.

For example not properly managing cash flow can cause severe liquidity crisis leading  to closure of business. Likewise, if the working capital is not managed properly it can lead to funds crisis further leading to severe problems for the businesses. Therefore, it is important to lay strong foundation of robust accounting, financial, commercial systems in the organizations.

 The chances of occurring above issues are less where the promoters are financial literate. Where the promoters are not financially literate, which happens in most of the cases, such bottlenecks are very common.

Lack of financial literacy and resultant problematic scenario discussed above could further worsen the situation. It can spoil the relation with bankers as there could be irregular repayment of financial obligations leading to risk of account being declared as NPA. (non- performing asset). The criteria used by banks to disclose accounts with certain repayment pattern. A bank would declare their customer who they have lent money as NPA where even the interest is not received from the customer/ borrower in the last 90 days)

Where the books of accounts compiled do not have certain features or certain strengths, they may not be inclined to continue their lending or may not consider them for lending purposes at the first instance itself. For Example, inadequate routing of cash flows from the designated account, Inadequate debt equity ratio, Inadequate current ratio, inadequate promoters margin in working capital assessment, long term solvency, ROI etc.

One of the easiest option to avoid above described situation is to take the services of some financial expert. But as all good things comes at a price, so is the services of a financial expert. Typically a financial professional with 10 to 15 years of experience would cost anywhere between 30 lacs to 50 lacs per annum. The revenue stream of a MSME or startup during the initial stages could not sustain such costs. Therefore, it’s a catch 22 situation.

The services of a flexi CFO provides solution here. A flexi CFO is a finance expert with years of diversified experience who make their services available on need basis. The cost of a flexi CFO is variable and not fixed, and therefore, provide flexibility to the small businesses. Usually, the services of a flexi CFO is taken for short duration such as 3 months, 6 months etc or once/ twice in a week or fortnight or month.

Following are the advantages of hiring the services of a flexi CFO:

1.     Benefit of years’ of experience.

2.     Optimized Cost of services.

3.     Robust foundation of accounting, financial, commercial systems, well defined

 work flow.

4.     Better Cash flow management & better liquidity in the business.

5.     Clarity =>Better Decisions=> cost savings and economies.

6.     Efficient decision making.

7.     Better relations and negotiations with banks.

How the services of a Flexi CFO are useful to MSME or a Startup:

1.     With a Flexi CFO comes not only the years of curated experience, but also a network of investors, banks, consultant, advocates, reach in Government departments, access to markets, contacts with vendors etc. The businesses can take advantage of the same.

2.     In setting up robust system of accounting, Supply Chain Management (SCM), Inventory Control system, commercial management and working capital management system

3.     Setting up of a good MIS system that help day to day decision making.

4.     Timely Compliance of various laws and regulations

5.     Books of accounts and records that are in compliance of various statues.

6.     Books of Accounts that comply the requirement of banks

7.     Professional advice in strategic matters.

8.     Setting up of a judicious capital gearing.

9.     Optimum cost of capital.

10.  Helps funds mobilization.

 

Conclusion:

The concept of a flexi CFO due to its inherent merits is being widely accepted by the Startups and Small and Emerging Businesses. On the one hand the services are lighter on the pockets and on the other hand the befits are immense.

 

                                            --------------------------------

 

Cost Control an effective tool for better management

                                

 

Cost Control and Cost Reduction

 

Cost Control is a process in which we focus on controlling the total cost through competitive analysis. It ensures that the cost incurred on a business process should not go beyond the pre-determined cost. Cost Control involves a chain of various activities, which starts with the preparation of the budget in relation to production. Thereafter we evaluate the actual performance. After that we compute the variances between the actual cost and the budgeted cost and further, we find out the reasons for the same. Finally, we implement the necessary actions for correcting discrepancies.

Advantages of Cost Control:

 i) Cost control helps to achieve expected return on the capital invested in a company, by resolving deviations between actual and expected standards. ii) Cost control leads to improved standards of production with the limited resources of the company. 

iii) Cost control reduces the prices or tries to maintain them by reducing the cost.

 iv) Cost control leads to the economic use of resources. 

v) It increases the profitability and competitive position of a company. 

vi) It enhances credit worthiness of the company.

vii) It prospers and increases the economic stability of the industry. 

viii) It increases the sales of the company and maintains the level of employment. 

Disadvantages of Cost Control:

 i) It reduces the flexibility and process improvement in a company. 

ii) It restricts innovation by emphasizing to reaching the preset standards 

iii) It requires skilled personnel to set standards. 

iv) It lacks creativity as it is concerned with following the current standards. 

v) It does not lead to improvement in standards.

 

Steps Involved in implementing cost control in an organization:

 

1.   Plan your budget: The first step is to plan your budget for each business activity. Define standards for your business activity for which a cost control program is intended to be implemented.

2.   Monitor all expenses: Once the budget has been planned/standard defined, all expenses need to be monitored regularly.

3.   Use change control systems: Change control systems should be used to manage any changes that occur during the project.

4.   Manage your time: Time management is crucial for effective cost control. With the passage of time even otherwise also cost tend to increase.

5.   Track earned value: Earned value is the value of work completed compared to the planned value.

6.   Costs should be analyzed as the cost incurred, cost to be incurred vis a vis earned value.

7.   Estimate the overall cost of resources needed for the work: The overall cost of resources needed for the work should be estimated.

8.   Allocate the budget to each task: The budget should be allocated to each task.

9.   Measure differences from baseline budget: Differences from the baseline budget should be measured regularly.

10 Forecast final costs: Final costs should be forecasted based on the progress made so far.

 

11.  Determine the causes of cost overruns: Causes of cost overruns should be determined so that corrective action can be taken. The process shall also help in reviewing the standards and also setting standards in the future.

Techniques of Cost Control:

 

1. Budgetary control: The budgetary control is the process of continuous comparison. It works with creating budgets and continuous comparison of these budgets with the actual. It is finding the reasons for deviations and revising the budgets with needs. It helps in planning coordination and controlling. 

 

2. Standard costing: Standard costing is setting a standard cost and using this standard cost with actual and analyze the variances. It helps in identifying the causes of variances and cost estimation. 

 

3. Inventory control: Inventory control is regulating the purchase, and usage of materials to maintain production without blocking the extra funds into it. It tries to reduce the wastage of the material and leads to effective utilization of it. 

4. Ratio analysis: Ratio analysis identifies the relationship among different variables. It helps to identify the trends in an organization. Ratio analysis is also used for the comparison of different organizations on different aspects. It is mainly used for comparing performance with other organizations and external standards.

5. Variance analysis: Variance analysis is a method of cost control. It involves the identification of the amount of variance and to analyze the reasons for these variances. A variance is which varies from the standards set. It can be favorable or unfavorable.

 Is the Cost Control and Cost Reduction are the same? Difference between Cost Control and Cost reduction:

 

Cost control and cost reduction are two different concepts. Cost control is the process of managing costs to ensure that they do not exceed the budgeted amount. It involves identifying and analyzing the costs of various business activities and then taking steps to measure, compare & then reduce them. Cost reduction, on the other hand, is the process of reducing costs to improve profitability. It involves identifying and eliminating unnecessary costs without affecting the quality of the product or service.

 

BASIS	COST CONTROl	COST REDUCTION
Steps involved	Cost Control process involves defining the standards, measuring actual performance, comparing actuals with standards, estimating variances and taking corrective actions.	Cost Reduction is critical analysis of existing standards to improve the standards rather than creating the standards.
Techniques	Cost Control uses techniques like budgetary control and standard costing	Cost Reduction uses tools like simplification, standardization, value engineering, ABC analysis, etc.
Focus	Cost Control focuses on maintaining the standards and achieving the established standards	Cost Reduction is challenging all the predefined standards and brings cost down further.

  

Time period	Cost Control is not a dynamic function; it tries to reach to the minimum cost at a given point of time	Cost Reduction is a continuous process. It is not a period based concept but it analyses new ways to reduce cost.
Orientation	Cost Control is focused on the past and present cost data.	Cost Reduction is a future oriented concept.
Nature	Cost Control can be regarded as a preventive function as it attempts to maintain the cost at the required pre-set standards	Cost Reduction is a corrective measure. It tries to improve the efficiency of the existing control mechanism. It assumes that there is always scope of reduction.
Permanency	Cost Control is temporary in nature. It is just a measure to reduce variances between actual and budgeted.	Cost Reduction is permanent reduction in cost of a good or a service
Cost concerned	Cost Control focuses on reducing the overall cost.	Cost Reduction is an attempt to reduce the per unit cost
Quality concerns	Cost Control does not talk of quality of the product; it focusses on reduction only.	Cost Reduction is reducing the cost whole maintain the quality of the product.
Frequency	Cost Control is more of a routine activity. It requires close monitoring.	Cost Reduction is research oriented; it is a form of improvement so it demands creativity.

How to measure the effectiveness of control

 

To measure the effectiveness of your cost control measures, you can use a cost-effectiveness analysis. This involves measuring the outcome of the activities or interventions you are comparing and calculating the costs of those activities or interventions. You can then divide the costs by the outcome to get the cost-effectiveness ratio. This ratio indicates how much it costs to achieve one unit of outcome. The lower the ratio, the more cost-effective the activity or intervention is1.

 

Example of Cost Control:

·        Renegotiating contracts with more favorable terms

·        Getting more competitive bids from different vendors

·        Improving product quality to reduce rework and scrap

·        Reducing the number of items carried in inventory

·        Reducing employee expenses with better expense management 

·        Accounts payable outsourcing

·        Increasing efficiency with automation software 

·        Taking early payment discounts on accounts payable

 

control and cost reduction?

 

                         ------------------------------