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Editorials

by Rajen Kumar

For over four years now, we have been making relentless efforts to fill information deficit that painfully exists in the country's Micro, Small and Medium Sector. Encouragingly enough,...

Special Reports

Be Skeptical. Be very Skeptical. Mistake upon Mistake

In recent months, we've had a few slip-ups by the official statistical system in India: • Yesterday's IIP release was preceded by a mistake. Mint says: On Monday, the...

• Be Skeptical. Be very...
• Ahmedabad Unit Makes...

On the Stands

Traditional Finance Model for SMEs to Change

The Small and Medium Enterprises (SMEs) play a catalytic role in the development process of most economies as they constitute a major part of the industrial activity. This is reflected in the form of their increasing number and rising proportion in the overall product manufacturing, employment, technical innovations and promotion of entrepreneurial skills. The contribution of SMEs in the development of Indian economy has been significant, both in terms of contribution to GDP and creation of employment opportunities. They contribute around 20% of GDP and are the largest generator of employment (approximately 25 million). In India, SME sector is the second largest employer, after agriculture.

 

An entrepreneurial venture / SME typically start off with bank loans (debt) / personal savings and then receive VC funding or support from angel investors. It is taken over by Private Equity (PE) players once it reaches a certain size and lists on a stock exchange when it reaches the next level.

 

The cost of raising capital for SMEs is quite high. The current means of financing for SMEs are not adequate as they do not have easy access to funds from Angel Investors, VCs and PE players. Most costs of compliance in raising capital under the existing guidelines are fixed. As a result, the costs become burdensome for smaller issues.

 

Government/market regulator ( I hate calling the word watchdog : sounds derogatory) The Securities and Exchange Board of India (SEBI) were contemplating on these facts from quite an amount of time. The focus was on to provide the SMEs with a framework that would enable them to raise capital quickly and at a low cost. Internationally also, countries have provided for a separate exchange / trading platform to facilitate listing of securities of growth companies/new economy companies / small and medium companies. Some of the examples are the Alternative Investment Market (AIM), London, the Growth Enterprises Market (GEM), Hong Kong and MOTHERS, JAPAN.

 

On Wednesday (May 25th 2011) SEBI permitted the Bombay Stock Exchange (BSE) and the National Stock Exchange to launch a separate trading platform for small and medium enterprises (SMEs) segment. This will give them access to the capital markets in an efficient manner (quickly and at a lower cost) and help raise capital to meet their growth opportunities.

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Benefits of an alternative exchange to an SME are

 

1. Eligibility to raise Capital

 

The requirement of having net tangible assets of at least Rs. 3 cr. in each of the preceding 3 full years, a track record of distributable profits for at least 3 out of immediately preceding 5 years and a net worth of at least Rs. 1 cr. in each of the preceding 3 years, as per the existing ICDR regulations is relaxed for a company to be listed on SME exchange.

 

2. Clearances will take less time

 

There will not be any requirement of vetting of the offer document by SEBI since the investors in Companies listed on the SME Exchange/platform are expected to make informed and calculated investment decisions.

 

3. Continuous Listing Requirements are relaxed

 

Companies may post their annual reports on their web-sites and the web-site of the exchange. Physical copies of the same may be provided to the shareholders only on specific request. The requirement of sending annual reports to all the shareholders may be dispensed with. Preparation and submission of financial results on a “half yearly basis” for SMEs, instead of “quarterly basis”.

 

Who can raise capital on an SME exchange?

 

1. A company whose post issue face value capital does not exceed ten crore rupees

 

2. A company whose post issue face value capital is more than ten crore rupees but less than twenty five crore will have the option to list on the SME Board or the main Board.

 

In order to have “only informed, financially sound and well-researched investors” in the proposed exchange for SMEs, SEBI has proposed a minimum investment size, around Rs 1 lakh, at the time of the IPO of a company. To facilitate retail participation in SMEs for investors having high-risk appetite, specific allocation through mutual funds may be permitted.

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Further the key points to be noted are.

 

1) The issue need to have 100% underwriting and Merchant banker shall underwrite minimum 15% from its own funds.

 

2) The Merchant Banker to the issue will bear the overall responsibility for market making for a minimum period of three years.

 

3) Promoter's Lock in (promoter equity shares) regulations are applicable as per the existing ICDR regulations.

 

4) A minimum trading lot of Rs 1 lakh needs to be prescribed. This means retail investors won't be able to directly invest or trade in companies listed on the SME exchange (though i personally feel since now the retail category in an IPO is now 2 lacs they should make it to 2 Lacs)

 

5) Merchant Bankers would be allowed to do market making along with a disclosed nominated investor (like PE, VC, HNI and QIB). Under this arrangement, all the stock being bought and sold as part of market making will ultimately get transferred to the disclosed nominated investor with whom the Merchant Banker has a contractual agreement. Merchant Banker would have to disclose their intention of this arrangement and have it approved by stock exchanges where the issuer SME is listed.

 

6) Certain well capitalized registered entities like Venture Capitalists may be allowed to have a contractual agreement with the Merchant Banker to share the burden of development of underwriting obligation.

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7) During the compulsory market making period, promoters/acquirers will be allowed to dilute their shareholding only through offer for sale or to an acquirer and not to a market maker.

 

8) SEBI regulations on Takeover (Substantial Acquisition of Shares and Takeovers Regulations) will not be applicable to acquisition of shares through Merchant Banker /Market Maker provided that the Merchant Banker/Market Maker does not have the intention of taking over the management and there is no change in control (direct /indirect) of the company. However they can have a representative on the Company Board.

 

9) Investors with holdings of value less than Rs. 1, 00,000 (such reduction in the holding may have been due to fall in prices or his having offloaded a part of the holdings previously), are allowed to off load their holding to the Market Maker in that scrip. (Provided that the investor sells his entire holding in that scrip in one lot). Market Makers will be authorised to buy these shares from such investors.

 

SME bourse is not for Retail Investors. It is being opened to help companies to have an alternate source of raising finance and as far as investing in such scrip's goes its up-to the informed, financially sound and well-researched investor with a high risk appetite.

 

Overall, this is a welcome move as it could potentially create financing avenues for SMEs and also a separate market for investors keen to target that segment of the economy. However, there is a word of caution here particularly in view of past attempts which have failed. From a legal view, it is likely to be more difficult to control the activities of SMEs as they may not have adequate infrastructure to meet with the audit, reporting and compliance procedures as compared to the established corporate.

 

Our Achievements

• Winner of appreciation award for promoting SMEs in India.
• 1st ever Indian magazine to penetrate tier II, III cities & the rural belt.
• Industry Partnerships include CII, FICCI, ASSOCHAM, PHDCC, AIMA, ITPO, SME Network, Federation of Indian Micro Small Enterprises (FISME)
• Official Magazine Partners for several national & international MSME events.

The Last Word

Down the Memory Lane

Zainul Abdin was the only person who would pour his heart out to me in a mix of Urdu-Hindi (Hindustani ) in hush-hush tones during the war-torn Dhaka (then Dacca) in the early 70s where I worked...

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