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.

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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