Funding for small business enterprises

What is SME exchange?

‘SME Exchanges’ are trading platforms of recognised stock exchanges that have nationwide trading terminals permitted by the Securities Exchange Board of India (SEBI) to list specified securities following Chapter IX of SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018. It does not include the main board exchanges such as National Stock Exchange (NSE) or Bombay Stock Exchange (BSE). These are separate stock exchanges dedicated to working for SMEs. It is an ideal platform to raise funds for companies that are on a growth path but are not large enough to get listed on national exchanges. Currently, India has two SME Exchanges formed by the popular main board companies– NSE Emerge and BSE SME Platform, both launched in 2012. These SME exchanges provide a great opportunity for small and medium enterprises to raise equity capital for their organic or inorganic growth and expansion plans. The SME Exchanges handle the trading of securities of small and medium enterprises who would otherwise find it a difficult and costly affair to get listed on a recognised stock exchange. There are around 394 companies listed on the BSE SME and 235 on NSE Emerge with a combined capitalisation of more than INR 34,000 crores. These numbers are rapidly increasing in the post-pandemic economy where the number of companies going for IPOs has spurred.

What is the benefit of listing on SME Exchanges?

SME Exchanges are capital markets for small and medium enterprises which provide a credible and efficient marketplace, converging sophisticated investors and small businesses with growth potential. The investors get an opportunity to invest in emerging businesses while the companies get the benefit of raising capital from the public.

  1. The listing of the company would bring enormous financing opportunities by offering equity and bringing public funds into the business. Since equity does not carry periodic interest it has a relatively lower cost of borrowing.
  2. The listing also leads to improvement in credit rating and thereby allows raising other loans at a lower rate of interest.
  3. Apart from all the other benefits, one prominent and under-recognised benefit of the listing is the brand recognition and business visibility that the company gets after listing. 
  4. With the listing, the company opens its affairs to the public at large. This gives more assurance and adds to the comfort of stakeholders such as customers, lenders, and creditors who transact routinely with the company. At times, this confidence also reflects in increased orders, and better negotiations of business terms like credit period, margin, etc.
  5. Listing unlocks the hidden value of the unlisted companies which is otherwise never realised until the public investors reflect their perception through the stock price. The stock price acts as the fair value of the company and its potential, making its shares exchangeable like currency for various purposes such as offering as collateral, mergers and acquisitions etc.
  6. There is no tax on the equity infused at a premium exceeding its fair price. As per the Finance Act 2012, a company is liable to pay tax on equity shares issued at a premium exceeding the fair value. However, this tax is not applicable if the company shares are listed. Besides, buying shares of an unlisted company below its net worth attracts tax on the investors, however, in the case of listed companies there is no such tax incidence. Further, listed companies are also exempt from paying taxes on the buyback of shares which is otherwise taxable at 20% in the case of unlisted companies.
  7. The listing also helps companies in strengthening their internal governance systems which leads to better internal controls and unlocks efficiencies.

General listing requirements of SME Exchanges

For a company to get listed and raise funds on the SME Exchanges, it must fulfil the following requirements:

The company must be a public company incorporated in India under the Companies Act.

The post-issue paid-up capital of the company at face value should not be more than INR 25 crores.

The company should have a positive net worth. The net tangible assets and net worth excluding revaluation reserves should be more than INR 1 crore as per the latest audited financial statements, to be listed on BSE SME.

There should not be any change in the promoters of the company in the preceding year from the date of applying with the exchange.

The company, its promoter, promoter company or its erstwhile legal structure such as Limited Liability Partnership, Partnership or Sole Proprietorship enterprise must have a combined track record of at least 3 years. Otherwise, if the company has been funded by banks or financial institutions or the Central or State Government for at least 2 years out of the past three years, it would be considered as fulfilling the condition of track record.

The company or its erstwhile legal structure should have distributable profits (positive cash accruals before depreciation and tax) in at least two of the past three years.

A company which is currently referred to the Board for Industrial and Financial Reconstruction (BIFR), also cannot apply. Also if there are any winding-up petitions against the company which have been admitted by a court or a National Company Law Tribunal (NCLT), it cannot apply.

There should not be any material regulatory or disciplinary action taken against the company in any of the past three years by a stock exchange or regulatory authority.

The issue has to be a 100% underwritten issue with Merchant Bankers underwriting at least 15% on their accounts. There should be at least 50 investors while listing through IPO.

The company should agree to facilitate trading through a Demat account with both the depositories – Central Depository Services Limited (CDSL) and National Securities Depository Limited (NSDL).

The company must have a website.

The listing procedure of SME Exchanges

The highlights of the listing procedure of SME exchange are as follows:

Appointment of Intermediaries – Initially the company has to appoint Merchant bankers registered with the Securities Exchange Board of India (SEBI) to act as Lead Managers on the issue. Popular merchant bankers include Yes Bank, ICICI Securities, Kotak Mahindra, Axis Bank, Goldman Sachs, Barclays, Citigroup, Morgan Stanley, Karur Vysya Bank, State Bank of Bikaner and Jaipur, SBI Capital Markets, Punjab National Bank etc. The company will also need to appoint underwriters and legal advisors.

Pre-IPO Stage – After appointing intermediaries, the company has to complete the procedural aspects such as increasing the authorised share capital, passing resolutions for the issue of share capital, restructuring the board of directors, appointing the directors to satisfy the conditions of the Companies Act and SEBI regulations and all other such regulatory requirements. The company cannot proceed to apply for the exchange until these requirements are fulfilled.

Preparation Stage – At this stage, the lead manager conducts due diligence of the company to ensure that all the documentation including all the financial documents, material contracts, approvals, promoter details etc. are available, authentic and fulfil the requirements of the exchange. This exercise also helps in preparing offer documents.

Draft Prospectus – The merchant banker prepares the draft prospectus and files the same along with the other documents following the SEBI (ICDR) regulations and other statutes, as applicable.

Application to SME Exchange – After completion of due diligence and in principal approval of the draft prospectus, the company applies with the stock exchange for an admission of their securities at their exchange.

Filing of Prospectus – The Merchant Banker then files these documents with the Registrar of companies indicating the opening and closing date of the issue. Once approval is received from the registrar, the same is intimated to the Exchange along with the required documents.

Basis of Allotment and Issue of Shares – The stock exchange then finalizes the basis of allotment and issues the notice regarding listing and trading.