Now SMEs in India will have a shorter waiting period for listing on Stock Exchanges.
In March of 2012, the country’s leading stock exchanges – BSE and NSE – announced the launch of the BSE SME and NSE Emerge respectively, both of which are aimed at providing small and medium enterprises (SMEs) an alternate avenue for raising finance through equity placement. While SMEs play a significant role in the country’s economic development through employment generation, manufacturing and export growth, and support activity for large industries, until now, their access to capital has been restricted to debt financing.
Small and Medium Enterprises account for 17% of the Indian GDP, and their contribution is expected to rise to 22% by 2020. However, during the growth phase, most SMEs encounter the issue of being over-leveraged, at which point banks become hesitant about extending additional credit, thereby resulting in a slowdown in the company’s growth. In such a scenario, raising finance through the equity market by listing on BSE SME or NSE Emerge presents the option of tiding over the crisis as well as creating opportunities for further financing at a later stage.
Listing on the stock exchange requires adherence to regulatory mechanisms such as getting balance sheets audited and implementing corporate governance practices, which in turn guarantee more transparency in operations. As a result, banks and lending institutions are also more likely to look favorably at sanctioning additional finance to SMEs listed on BSE SME and NSE Emerge. In addition, listing is beneficial to SMEs for several other reasons such as increased publicity and visibility, the possibility of offering employee stock options (ESOPs) and better prospects of attracting venture capital financing. Investors too prefer buying stocks listed on the exchanges since it offers an easy exit option and liquidity.
There are certain eligibility criteria that SMEs have to meet before listing on either BSE SME or NSE Emerge. Firstly, the company has to be incorporated under the Companies Act of India, 1956. In addition, the post issue paid up capital of the enterprise cannot exceed Rs.25 crores. The SME should also have been in existence for a minimum period of three years and must have a positive net worth and cash accruals (profit before depreciation and tax) for at least the preceding two years. Besides this, a few other listing conditions and disclosures have to be met for gaining eligibility.
Before listing on BSE SME and NSE Emerge, SMEs also have to be prepared in other ways by strengthening their operations. This includes maintaining up to date annual reports and accounts, maintaining documentation regarding past performance, carrying out due diligence with regard to adhering to regulations and approvals from regulatory bodies, documenting business risk and external environmental factors that affect business, listing pending litigations, and preparing detailed reports on the management and promoters.
Once this is done, the next step involves finding a suitable merchant banker for the IPO, who would be attached to the SME for a minimum period of three years for market making activities. The selected merchant banker would be responsible for performing due diligence on financial and legal aspects before preparing the offer document. Additionally, they would provide advice on other factors such as capital restructuring and valuation, which are crucial for identifying the financial strength of the company and also have a bearing on the size and pricing of the IPO.
Investors can download the prospectus from the BSE or NSE website and subscribe to an IPO by providing an Application Supported Blocked Amount (ASBA), which will be blocked by the self-certified banks from their account as per the details provided in the application. The minimum application and trading lot size cannot be lower than Rs.1,00,000, and the issue has to get a minimum of 50 investors.
The costs of listing on SME exchanges are estimated to be relatively lower than going in for an issue on the main exchange. This is mainly because medium sized merchant bankers, whose fees are more reasonable than that of large merchant bankers, would work on listings for SMEs in BSE SME and NSE Emerge. There are also other pre and post IPO expenses that have to borne by the SMEs. Of this, post IPO expenses can be paid out of the funds raised through the issue. Hence, only costs towards initial regulatory expenses and other pre-IPO expenses need to be borne by the company. The total costs would work out to approximately 7-8% for an IPO of Rs.10 crores.
At present the BSE SME is operational and has a couple of stocks already listed, including BCB Finance Limited, which was the first listing. NSE Emerge, which had a soft launch in March, is yet to have stocks formally listed on it. However, it expects to have around 10 stocks listed over the next six months, while BSE SME is targeting a listing of 100 companies over one and a half years.
For the 30 million SMEs in India, the launch of these two exchanges is good news, as they will bring an additional source of capital that will be less risky than debt new financing options. As per estimates, around 1 million SMEs are eligible to be listed on the BSE SME and NSE Emerge. Even if a percentage of these enterprises get listed in the next few years, the SME sector will receive a much needed boost.