Listing on SME Stock Exchange

BSE Ltd has set up the BSE SME Platform & NSE has set up “Emerge”, as per the rules and regulations laid down by SEBI. The SME Platform offers an entrepreneur and investor friendly environment, which enables the listing of SMEs from the unorganized sector scattered throughout India, into a regulated and organized sector.

WHY SME ?

The listed SMEs will step into the threshold of SME Platform and foray in to the world of finance for further growth and development. SME will assist these SMEs to raise equity capital for their growth and expansion and thus help them blossom into full-fledged companies. In due time enable them to migrate into the Main Board of BSE / NSE as per the existing rules and regulations.

BSE / NSE SME will provide immense opportunities to the following market participants.

Entrepreneurs

To raise equity capital for growth and expansion of SMEs in a cost effective manner.

Investors

Opportunities to identify and invest in good companies at an early stage, long term Capital Gain tax benefit and Exit Route.

Tax Benefits

 About Public Issues

Corporate may raise capital in the primary market by way of an initial public offer, rights issue or private placement. An Initial Public Offer (IPO) is the selling of securities to the public in the primary market. This Initial Public Offering can be made through the fixed price method, book building method or a combination of both. SEBI has come out with Small & Medium Enterprises (SME) stock exchange Regulations to enhance capital market penetration in the SME segment.

As of 31 March 2017, there are 173 Companies listed in BSE SME Exchange & around 60 entities in NSE’s Emerge.

Many good companies from areas like manufacturing, metals, information technology and others are coming to list on the SME platform

More About Book Building

Book Building is essentially a process used by companies raising capital through Public Offerings-either Initial Public Offers (IPOs) or Follow-on Public Offers (FPOs) to aid price and demand discovery. It is a mechanism where, during the period for which the book for the offer is open, the bids are collected from investors at various prices, which are within the price band specified by the issuer. The process is directed towards both the institutional as well as the retail investor The issue price is determined after the bid closure based on the demand generated in the process.

The Process

• The Issuer who is planning an offer nominates lead merchant banker(s) as 'book runners'.
• The Issuer specifies the number of securities to be issued and the price band for the bids.
• The Issuer also appoints syndicate members with whom orders are to be placed by the investor.
• The syndicate members input the orders into an 'electronic book'. This process is called 'bidding' and is similar to open auction.
• The book normally remains open for a period of 5 days.
• Bids have to be entered within the specified price band.
• Bids can be revised by the bidders before the book closes.
• On the close of the book building period, the book runners evaluate the bids on the basis of the demand at various price levels.
• The book runners and the Issuer decide the final price at which the securities shall be issued.
• Generally, the number of shares is fixed, the issue size gets frozen based on the final price per share.
• Allocation of securities is made to the successful bidder The rest get refund order.

Guidelines for Book Building

Rules governing Book Building Process are covered in Chapter XI of the Securities and Exchange Board of India ( Issue of Capital and Disclosure Requirements) Regulations, 2009.

Exchange’s Book Building System

• The Exchange offers a book building platform through the Book Building software that runs on the Exchange’s Private network.
• This system is one of the largest electronic book building networks in the world, spanning over 350 Indian cities through over 7000 Trader Work Stations via leased lines, VSATs and Campus LANS.
• The software is operated by book-runners of the issue and by the syndicate members, for electronically placing the bids on line on real-time basis for the entire bidding period.
• In order to provide transparency, the system provides visual graphs displaying price v/s quantity on the BSE website as well as all BSE / NSE terminals.

Benefits of Listing at SME Platform

1. Access to capital and future financing opportunities
   
   Going public would provide the SME's with equity financing opportunities to grow their business from expansion of operations to acquisitions.
   
   Companies in the growth phase tend to get over-leveraged at which point, banks are reluctant to provide further credit. Equity capital is then necessary to bring back strength to the balance sheet. The option of equity financing through the equity market allows the firm to not only raise long-term capital but also get further credit due through an additional equity infusion. The issuance of public shares expands the investor base, and this in turn will help to set the stage for secondary equity financings, including private placements.
   
   In addition, Issuers often receive more favorable lending terms when borrowing from financial institutions.
2. Increased visibility and prestige
   
   Going public is likely to enhance the company's visibility. Greater public awareness gained through media coverage, publicly filed documents and coverage of stock by sector investment analysts can provide the SME with greater profile and credibility. This can result in a more diversified group of investors, which may increase the demand for that company's shares leading to an increase in the company's value.
3. Venture Capital (VC)
   
   It has been seen that there is greater vitality of venture capital in stock market centered systems. The underdeveloped equity culture has made it difficult for companies to both get into the VC phase as well as graduate from venture capital/startups phase to a scale of operations that would make them internationally competitive. A vibrant equity market would provide to be an added incentive for greater venture capital participation by providing an exit option leading to a reduction in their lock-in period.
4. Liquidity for shareholders
   
   Becoming a public company establishes a market for the company's shares, providing its investors with an efficient and regulated vehicle in which to trade their own shares. Greater liquidity in the public market can lead to better valuation for shares than would be seen through private transactions.
5. Create employee incentive mechanisms
   
   The employees of the SME enterprises can participate in the ownership of their own company and benefit from being a shareholder. This can serve to ensure stronger employee commitment to the company's performance and success. Share options in a public company have an immediate and tangible value to employees, especially as a recruitment incentive.
6. Facilitate growth through Mergers and Acquisitions
   
   As a public company, company's shares can be utilized as an acquisition currency to acquire target companies, instead of a direct cash offering. Using shares for an acquisition can be a tax efficient and cost effective vehicle to finance such a transaction.
7. Encourages Innovation & Entrepreneurial Spirit
   
   The ability of companies in their early stages of development to raise funds in the capital markets allows these companies to grow very quickly. This growth helps speed up the dissemination of new technologies throughout the economy. In addition, by raising the returns available from pursuing new ideas, technologies etc. the capital markets facilitate entrepreneurial activities.
8. Efficient Risk Distribution
   
   The development of the capital markets has helped distribute risk more efficiently by transfer of risk to those best able to bear it. This ability to transfer risk facilitates greater risk- taking, but this increased risk-taking does not destabilize the economy. Thus the capital markets ensure that capital flows to its best uses and that riskier activity with higher payoffs are funded.
   
   Despite the many benefits associated with public listing, the SME's are not able to access the capital markets through existing Stock Exchanges due to the stringent regulatory, disclosure and financial requirements.

Guidelines for Listing SME

SEBI has time to time issued the circulars and guidelines for setting up of the exchange for small and medium enterprises. These circulars have been revised after taking suggestions from market participants for the SME exchange. The final circular was issued on 18th May, 2010.The necessary provisions for the listing of specified securities under the SME exchange have been made in the Chapter XA of Issue of Capital and Disclosure Requirements (ICDR).

The guidelines emphasis on the following :

• The post issue face value capital should not exceed Rupees Twenty Five crores.
• The minimum application and trading lot size shall not be less than ₹ 1,00,000/-.
• The existing members would be eligible to participate in SME exchange.
• The issues shall be 100% underwritten and merchant bankers shall underwrite 15% in their own account.
• A minimum number of 50 (Fifty) investor is required at the IPO stage only. There shall be no continuous requirement of minimum numbers of shareholder.

SEBI has compulsorily mandated market making for all scripts listed and traded on SME exchange.

The obligations for market makers are as follows:

• The merchant bankers to the issue will undertake market making through a stock broker who is registered as market maker with the SME exchange.
• The merchant bankers shall be responsible for market making for a minimum period of 3 year.
• The market makers are required to provide two way quote for 75% of the time in a day. The same shall be monitored by the exchange.
• There will not be more than 5 market makers for a scrip.
• Market makers will compete with other market makers for better price discovery.
• The exchange shall prescribe the minimum spread between the bid and ask price.
• During the compulsory market making period, the promoter holding shall not be eligible for the offering to market maker.
• Market Maker shall be allowed to deregister by giving one month notice to the exchange.
• Trading system may be either order driven or quote driven.

The application and trading lot size is being kept at ₹ 1,00,000/- so as to curtail the entry of retail investor It has also been stated that the minimum depth shall be of one lakh rupees and at any point of time it cannot go below that amount. The investors holding with value less than ₹ 1,00,000/- shall be allowed to offer their holding to the market maker in one lot. However, in functionality the market lot will be subject to revival after a stipulated time.

To be listed on the SME Exchange, the post-issue paid up capital of the company should not exceed INR 25 Crore. This means that the SME Exchange is not limited to the Small and Medium Scale enterprises which are defined under "The Micro, Small and Medium Enterprises Development Act, 2006" as enterprises where the investment in plant and machinery does not exceed INR 10 Crore.

As of now, to get listed on the Main Board of National Stock Exchange (NSE), the minimum paid up capital required is INR 10 Crore and that of Bombay Stock Exchange (BSE) is INR 3 Crore. Hence, those companies with paid up capital between INR 10 Crore to INR 25 Crore has the option of migrating from SME Exchange to the Main Board or vice versa.

The companies listed on the SME exchange are allowed to migrate to the Main Board as and when they meet the listing requirements of the Main Board and there shall be compulsory migration of SMEs from the SME exchange, in case their post issue paid up capital exceeds INR 25 Crore.

44 small and medium enterprises (SMEs) got listed on capital markets with initial public offerings worth Rs 290 crore in the year 2015-16. This was higher than 37 SMEs raising a total of Rs 271 crore in 2014-15. The companies which got listed in the past fiscal are from sectors such as agriculture, realty, NBFC (non-banking finance company), manufacturing and services, among others.

The platform provides opportunity to SME entrepreneurs to raise equity capital for growth and expansion. It also provides immense opportunity for investors to identify and invest in good SMEs at an early stage.