SME IPOS ARE A GREAT WAY TO GO PUBLIC.
Have you ever heard of a small business initial public offering (IPO) or how they work? They aren't quite as difficult as they appear. This article will provide you with a fundamental grasp of the notion of a small business initial public offering (IPO), the establishment of small business exchanges in India, and the listing criteria and procedure. But, before we go any further, let us define small and medium companies (SME's). MSME's in India are currently defined by their investment in plant and machinery/equipment as well as their annual turnover. The government has established new criteria for classifying micro, small, and medium firms, which will take effect on July 1, 2020:
|Classification of Micro, Small and Medium Enterprise (MSME) sector|
Investment in Plant & Machinery and Annual Turnover
|Manufacturing and Service Sector Enterprise||Investment in Plant & Machinery or Equipment upto Rs. 1 crore
Annual Turnover does not exceed Rs. 5 crores
|Investment in Plant & Machinery or Equipment upto Rs. 10 crores
Annual Turnover does not exceed Rs. 50 crores
|Investment in Plant & Machinery or Equipment upto Rs. 50 crores
Annual Turnover does not exceed Rs. 250 crores
*Source from Ministry of MSME
After agriculture, the SME sector generates the second biggest number of jobs in India. It also makes a substantial contribution to the economy's innovation, exports, and inclusive growth. They are the backbone of our country's socioeconomic progress. The MSME sector accounts for roughly 30% of the Indian economy's GDP. However, the SME sector faces a number of hurdles that limit its expansion. Financing continues to be one of the biggest issues preventing the sector from working properly. SMEs are having difficulty obtaining credit from a variety of financial institutions.SME prospects are further hampered by onerous regulatory methods and loopholes. Furthermore, the credit they are given is insufficient and comes at a great cost.
To address this issue and provide SME's with a platform for raising needed capital and expanding their financing options, the Prime Minister's Task Force (Jan. 2010) recommended the establishment of a dedicated Stock Exchange/Platform for SMEs, where IPOs of small and medium businesses could be launched. According to the SEBI (Issue of Capital and Disclosure Requirements) Regulations 2018, a "SME Exchange" is a trading platform of a recognised stock exchange with nationwide trading terminals that is permitted by the Board to list the specified securities issued in accordance with Chapter IX, and includes a stock exchange that has been granted recognition for this purpose but excludes the Main Board. In addition, the SEBI established regulations for the governance of the SME Exchange. The Bombay Stock Exchange and the National Stock Exchange, respectively, developed separate exchange platforms for SMEs in 2012, dubbed BSE SME and NSE EMERGE.
The Over-The-Counter Exchange of India (OTCEI) had been created for the same purpose in 1990. It was India's first exchange for small businesses, as well as the country's first screen-based stock market. However, it was unable to obtain the necessary support at the time, and as a result, the SEBI de-recognised it in 2015.
In India, there are currently just two SME Exchanges: BSE SME (BSE) and EMERGE (NSE), both of which have their own eligibility criteria for SME listing in addition to the SEBI standards.
Criteria for listing on BSE SME Platform and NSE EMERGE Platform
|Parameter||BSE SME Listing Criterion||NSE EMERGE Listing Criterion|
|Incorporation||The Issuer should be a company incorporated under the Companies Act 1956 / 2013 in India||The Issuer should be a company incorporated under the Companies Act 1956 / 2013 in India|
|Post Issue Paid up Capital||The post issue paid up capital of the company (face value) shall not be more than Rs. 25 Crores||The post issue paid up capital of the company (face value) shall not be more than Rs. 25 Crores.|
|Net worth||Positive Networth||Positive Networth|
|Tangible Asset||Net Tangible Assets should be Rs 1.5 Crore||No such requirement|
|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
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.
|♦ Track record of atleast three years of either:
i. the applicant seeking listing; or
ii. the Promoters****/ Promoting Company, incorporated in or outside India or
iii. Proprietary / Partnership firm and subsequently converted into a Company (not in existence as a Company for three years) and approaches the Exchange for listing.
****Promoters mean one or more persons with minimum 3 years of experience in the same line of business and shall be holding at least 20% of the post issue equity share capital individually or severally
♦ The Company/entity should have operating profit (earnings before interest, depreciation and tax) from operations for atleast any 2 out of 3 financial years preceding the application and its net worth should be positive.
|Other requirements/ listing conditions||1. It is mandatory for the Company to have a website.
2. It is mandatory for the Company to facilitate trading in demat securities and enter into an agreement with both the Depositories.
3. 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.
|1. The applicant Company has not been referred to erstwhile Board for Industrial and Financial Reconstruction (BIFR) or no proceedings have been admitted under Insolvency and Bankruptcy Code against the issuer and Promoting Companies.
2. The Company has not received any winding up petition admitted by a NCLT / Court.
3. No material regulatory or disciplinary action by a Stock Exchange or regulatory authority in the past three years against the applicant Company.
|Disclosures||1. The Company has not been referred to the Board for Industrial and Financial Reconstruction (BIFR).
2. There is no winding up petition against the company, which has been admitted by the Court or a liquidator has not been appointed.
|The following matters should be disclosed in the offer document:
1. Any material regulatory or disciplinary action by a Stock Exchange or regulatory authority in the past one year in respect of Promoters /Promoting Company(ies), Group Companies, Companies promoted by the Promoters / Promoting Company(ies) of the applicant Company
2. 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(ies), Group Companies, Companies promoted by the Promoters / Promoting Company(ies) during the past three years.
3. The applicant, Promoters/ Promoting Company(ies), Group Companies, Companies promoted by the Promoters / Promoting Company(ies) litigation record, the nature of litigation, and status of litigation.
4. 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.
Some common guidelines for listing on BSE SME Platform and NSE EMERGE Platform
- The minimum application and trading lot size shall not be less than Rs. 1,00,000/-
- The minimum number of prospective allottees shall be atleast 50.
- The issues shall be 100% underwritten and Merchant Bankers shall underwrite 15% in their own account.
- Offer Document [Draft Prospectus/Draft Red Herring Prospectus (DRHP)] is not subject to observation by SEBI. The SEBI has delegated the powers to Exchange with respect to approving the Draft Prospectus/Draft Red Hearing Prospectus.
- Market making is required for a minimum of three years through exchange-registered market makers.
- IPO Grading is not required for SME Exchange listing.
The procedure for becoming a listed company on the SME exchange is as follows:
- The issuer shall select one or more merchant bankers as lead manager(s) to the issuance, who must be registered with the Board.
- The issuer will appoint various additional intermediaries engaged in the listing process, such as RTAs, Bankers to the issue, Depositories, advertising agencies, printers, and so on, in collaboration with the lead manager(s).
- The merchant banker will next perform due diligence on the Company, which includes reviewing all financial records, material contracts, government approvals, and Promoter information, among other things. Planning the IPO structure, share issuances, and financial criteria are all part of this process.
- Following the conclusion of due diligence, the merchant banker must produce and submit a Draft Prospectus/Draft Red Herring Prospectus (DRHP) to the relevant Exchange and SEBI in accordance with the criteria. The offer document must include all material information that are accurate and sufficient to allow applicants to make an educated investment choice.
- The Stock Exchange will verify the documents and process them whenever they are pleased. The Stock Exchange representative will also pay a visit to the company's location. The Promoters will be contacted by the Listing Advisory Committee for an interview.
- On the Committee's suggestion, the Stock Exchange will provide In Principle Approval if the issuer company meets all of the requirements.
- The Merchant Banker must file a Red Herring Prospectus (RHP)/Prospectus with the ROC after receiving In Principle Approval from the Exchange, detailing the issue's opening and closing dates.
- Once the ROC has approved the issue, the Company will notify the Stock Exchange of the issue's opening date and submit all requisite paperwork.
- The public portion of the IPO will open and close according to the allotted schedule.
- Following the IPO, the Company submits the documents to the Exchange in accordance with the checklist to finalise the basis of allotment.
- Following the completion of the allocation, the Company must file a listing application with the Stock Exchange and acquire listing approval for the securities issued.
- Following listing clearance, Corporate Action must be completed with NSDL and CDSL in order to dematerialize the shares credited.
Today, the BSE SME Exchange has over 300 companies listed, while the NSE Emerge has over 200. SME platform listing is a simple process with fewer regulatory requirements, and it comes with a number of benefits. Small and medium firms have gained greater visibility and exposure as a result of the formation of these platforms, which would not have occurred if they were not listed on the market.As a result, a company's trust with its many stakeholders improves. With the debut of IPOs on SME platforms, issuer firms have access to a wide market for raising capital in the form of equity and recruiting new investors. Additionally, equity financing allows for growth prospects such as expansion, mergers and acquisitions, as well as liquidity for shareholders. One of the most significant benefits of being listed on SME platforms is the ability to migrate from the SME platforms to the main boards of the BSE and NSE once they have reached the prescribed level.