SME Exchange: An option for Fundraising

Evey small company has dreamed of getting listed on the stock exchange. But due to eligibility criteria, it was not possible. But now this dream can become true by taking some small steps. Benefit from getting listed, what are those small steps? what are the eligibility criteria? All these questions will be resolved in this article. BSE and NSE both are leading stock exchanges of India. And both have a separate platform for SMEs called SME Stock Exchange. This is a dedicated platform for SMEs after few years of getting listed on this platform and fulfilling other conditions listed SME can switch to the mainboard of Stock exchange where all the Small Mid cap and Blue-chip companies listed.

1. What is SME Stock Exchange?

It is a dedicated stock exchange and trading platform for SMEs only. 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.

2. Benefit of Listing at SME Stock Exchange

A. Listing Benefits

Easier to List

Min allottees required: 50 only – can be achieved with focused marketing.

Lower cost, time and effort to get listed.

100% underwriting

100% underwriting of the issue will ensure that the issue is fully subscribed.

Alternate Valuation

Potential based valuations could be offered by Informed investors rather than benchmarking with matured large Corporates on the main board.`

New class of investors

Platform will attract new class of long term Institutional risk investors (both in primary & secondary market), interested to invest in exciting fast growing companies in India on a regulated platform.

Migration to main Board on seasoning

Getting listed on SME Platform will allow companies to grow to serious size, conserve value and migrate to main board with more broad based IPOs.

B. Other Benefits

There are many benefits of listing, some illustrative benefits are as follows:

1. It will fetch more trust and credibility in the market, with vendors and employees also.
2. A regulated company create a different picture psychologically in every ones mind. Whether vendor, Supplier or employees.
3. 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. Increase in Borrowing power.
4. Company will get opportunity of merger and acquisition
5. It will create a new identification with peer group companies.
6. Equity financing enables liquidity for shareholders, provides growth opportunities like expansion, mergers and acquisitions, thus being a cost effective and tax efficient mode.
7. Employee Stock Options ensures stronger employee commitment, participation and recruitment incentive.

3. Eligibility Criteria

NSE and BSE SMEs exchange platform both have same criteria to some extend for SME listing which is as follows :-

Incorporation

The Company shall be incorporated under the Companies Act, 1956.

Financials

Post Issue Paid up Capital

The post issue paid up capital of the company (face value) shall not be more than Rs. 25 crores.

Net worth

Positive Net worth.

Tangible Asset

Net Tangible Assets should be Rs 1.5 Crore.

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.

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 and its net worth should be positive.

C. Other Requirements

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.

4. Difference between SME Exchange and mainboard

So these are the difference between SME and main Board Exchange platform. Where some reporting requirement, time frame and norms are relaxed for SMEs. And after a time frame when SME is eligible and fulfil the required criteria for Migrate to main board it will be migrated on main board.

5. Statics of SME Exchange

If we see the statics, on BSE SME platform around 324 companies successfully listed out of 380 companies who have applied. And 82 companies migrated to main board.

Around 200 companies listed on NSE SME platform and 22 has been migrated to main board.

6. Before listing checklist

SME Exchange provides the right launch pad for companies with strong business models and high growth potential. However, going public is a paradigm shift for a private company as it would be required to:

• Appreciate the need to meet initial and sustained expectations of external investors
• Appreciate the need to have a team, organization structure and internal processes which bring about investor credibility and capability to efficiently manage the capital market processes and increased level of scrutiny, reporting, compliances and regulatory obligations;

It is therefore critical that before considering a public listing, you have realistic awareness of your current level of preparedness and what needs to be done to become a successfully listed company

• Develop an understanding of the capital markets and the various processes involved in raising funds through an IPO.
• Weigh the IPO option vis-à-vis other options of raising funds.
• Once you choose to opt for the IPO route make a realistic assessment of your readiness for listing.
• Start upgrading and strengthening your internal processes and systems to meet the requirements of a publicly listed company.
• Crystallise your project and capital raising plans.
• Engage a merchant banker to assist you in the IPO process.

Reference: www.nseindia.com and www.bsesme.com

Disclaimer: The contents of this article have been prepared in accordance with the relevant provisions, and information available at the time of preparation. The views and opinions expressed in this article are those of the author and the author does not take any responsibility and cannot guarantee that no inaccuracy occurs.