IS SME IPO a good choice for small business? 

25-June-2019 by Virtue Ventures

To overcome previous condition, almost all major capital markets have realized the need for a separate exchange for SME segment. More than twenty countries operate separate SME bourses. These markets have tried to create a SME friendly market architecture supported by effective institutions and forging links to policies that foster a new class of investable equities. 

 

Recognizing this aperture and that SMEs fetch the major pie of any country's industrial activity, the BSE and the NSE launched their platform for small and medium enterprises to list on the BSE and the NSE and later migrate to the main board of the BSE and NSE without the need to make an initial public offering.

The BSE SME and NSE Emerge are a new source for SME IPOs and provide a listing opportunity to the SMEs with minimum compliances and cost compared to the main board. SME IPOs are spread across diverse sectors and are fast emerging as an alternate asset class for investors. 

 

The framework for setting up of SME exchanges was first promoted by SEBI in 2008. on Micro, Small and Medium Enterprises, which recommended setting up of SME exchanges to promote inflow of equity capital in this sector. 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.

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

CRITERIA FOR BSE LISTING

 

ü  Financials

·         Post-issue Paid-up Capital: The post-issue paid up capital of the company shall be at least Rs. 3 crores.

·         Net worth: Net worth (excluding revaluation reserves) of at least Rs.3 crore as per the latest audited financial results.

        ·         Net Tangible Assets: At least Rs.3 crore as per the latest audited financial results

ü  Track Record: Distributable profits in terms of Section 123 of the Companies Act 2013 for at least two years out of immediately preceding three financial years (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.

ü  Other Requirements:

·         The Company shall have a Website.

·         The company shall 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.

ü  Disclosures:

·         A 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). Note: Cases where company is out of BIFR are allowed.

·         There is no winding up petition against the company that has been accepted by a court.

 

 CRITERIA FOR NSE LISTING

ü  Post-issue Paid-up Capital: The post issue paid up capital of the company (face value) shall not be more than Rs. 25 crores.

ü  Track Record

  • The company should have track record of at least 3 years.
  • The company should have positive cash accruals (earnings before depreciation and tax) from operations for at least 2 financial years preceding the application and its net-worth should be positive.

ü  Other Requirements:

  • The applicant Company has not been referred to Board for Industrial and Financial Reconstruction (BIFR).
  • No petition for winding up is admitted by a Court of competent jurisdiction against the applicant Company.
  • No material regulatory or disciplinary action by a stock exchange or regulatory authority in the past three years against the applicant company.
  • Disclosures:  The following matters should be disclosed in the offer document:
  • Any material regulatory or disciplinary action by a stock exchange or regulatory authority in the past one year in respect of promoters/promoting company, group companies, companies promoted by the promoters/promoting company of the applicant company.
  • Defaults in respect of payment of interest and/or principal to the debenture/bond/fixed deposit holders, banks, FIs by the applicant, promoters/promoting company, group companies, companies promoted by the promoters/promoting company during the past three years. An auditor's certificate shall also be provided by the issuer to the exchange, in this regard.
  • The applicant, promoters/promoting company group companies, companies promoted by the promoters/ promoting company litigation record, the nature of litigation, and status of the litigation.
  • In respect of the track record of the directors, the status of criminal cases filed, or nature of the investigation being undertaken with regard to alleged commission of any offence by any of its directors and its effect on the business of the company, where all or any of the directors of issuer have or has been charge-sheeted with serious crimes like murder, rape, forgery, economic offences etc.



Procedure of Listing:



Why should startups explore IPOs on SME Exchanges?

  • Globally, the IPO market has been sizzling with a new breed of e-commerce, social media and mobile technology firms making a debut including Snapdeal, Flipkart, Paytm and InMobi have been knocking on the doors of private equity investors and studiously avoiding public markets.
  • These companies sell in India, they list overseas. Koovs is listed on AIM, a sub-market of the London Stock Exchange, the first Indian e-commerce company to list overseas. 

 

Reasons for the current spurt in SME IPOs?

 

  • In March 2018, SEBI announced that it is planning to allow startups to list on the SME platform as an opportunity to raise capital, apart from usual private equity and angel investment funding route.
  • It is proposed to give special relaxations to startups to list on the SME platform in terms of net worth requirements and profitability. The idea behind the move is to provide capital raising opportunities to small and mid-level startups.



Key differences between traditional Exchanges and SME Exchanges 

 

The main point of differences is launching an IPO on such platforms. Following are the parameter for listing on them:



Parameters

Traditional Exchange

SME Exchange

Offer document

Submitted with SEBI

Submitted with stock exchange

Post issue paid-up capital

Should be more than 10 crores

Should be less than 25 lacs

Underwriter

Mandatory, expect if 75% allotted to OIB

100% underwriting is mandatory

Market making

Not applicable

Mandatory for 3 years

IPO Application Size

Rs.5000 – Rs.7000

Rs.1,00,000

IPO Timeframe

6 months onwards

3 to 4 months

Reporting Requirements

Quarterly

Half-yearly

 

Benefits of SME Listing

  • SME Listing provides an additional opportunity to small and medium level entrepreneurs and corporates to raise equity capital.
  • Easy funding for new projects, expansions, diversifications and other similar projects.
  • With access to equity capital, organization’s debt burden can be reduced. This leads to reduced costs and well-balanced financials, improved financials, the Company can raise funds efficient rates. Once an SME is listed on the SME exchange, with time it can easily migrate to Main Board but only after approval is taken from existing shareholders.
  • The listing provides recognition and better market perception among prospective investors.
  • An SME IPO also opens up other ways to raise capital like right issue, preferential issue and also attracts other qualified and professionals’ investors.
  • The listing comes with liabilities of various disclosures which helps in maintaining transparency in the working.
  • Once a company is listed, it can be independently valued by the market forces.
  • The SME can launch IPO on the trading platforms by meeting minimum compliances ad listing requirements.