SME Exchange IPOs – Funding option for SME
In recent years, SMEs have got an opportunity to raise funds by getting it listed on the SME stock exchange in a similar manner as small, mid-cap, and blue-chip companies are listed on the mainboard.
This is a dedicated platform for SMEs and after few years of getting listed on this platform and fulfilling other conditions, the listed SME can switch to the mainboard.
What is the SME stock exchange?
- It is a dedicated stock exchange and trading platform for SMEs only.
- In India an SME exchange functions within a recognized stock exchange or the main exchange such as the BSE Limited and the National Stock Exchange of India.
- The name of the exchange for SME in BSE is BSE-SME exchange. The name of the NSE exchange for SMEs is EMERGE.
What are the eligibility criteria for listing on SME Exchange?
The Company shall be incorporated under the Companies Act, 1956.
- Minimum Post issued paid-up capital for BSE shall be Rs 3 crore and it shall not exceed Rs 25 crore i.e. should be between Rs 3 crore to Rs 25 crore.
- The minimum net worth of the company excluding revaluation reserve shall be Rs 3 crore as per a latest audited financial statement.
- Track record of profits- There should be distributing profits (excluding extraordinary income) for at least 2 years out of immediately preceding 3 financial years. If not so, then net worth shall be Rs 5 crore.
- Net tangible assets should also be Rs 3 crore.
- Sales of company should be approx. Rs 10 crore. This is as per experience, nowhere mentioned.
What are the other requirements for listing on SME Exchange
- It is mandatory for a company to have a website.
- It is mandatory for the company to facilitate trading in demat securities and enter into an agreement with both the depositories.
- There should not be any change in the promoters of the company in the preceding one year from the date of filing the application to BSE for listing under the SME segment.
- In case a company is a proprietorship or partnership, it can also apply and the date of incorporation since it is proprietorship/partnership will also be counted.
- The company or the partnership/proprietorship/LLP Firm or the firm which have been converted into the company should have a combined track record of at least 3 years.
- The company should not have been referred to BIFR or has come out of its ambit.
- No winding-up petition is admitted by a court of competent jurisdiction against the applicant company.
- No material regulatory or disciplinary action by stock exchange or regulatory authority is pending or in the past 3 years against the applicant company.
What are the benefits of SME Listing?
- Easier to list. Minimum allottee required is only 50 – can be achieved with focused marketing. Lower cost, time and effort to get listed.
- It helps to raise capital.
- 100% underwriting of the issue will ensure that the issue is fully subscribed.
- It helps in wealth creation and valuation of business.
- National and international credibility, branding and visibility.
- Capital gain tax benefits on listed shares as compared to unlisted shares.
- Instead of giving Fat salaries, you can give ESOPs to employees. Helps in talent retention.
- Increases net worth.
- Leveraging ratio gets more attractive and capacity to raise debt increases.
- Enhance visibility and credibility.
- Widens capital base and increases working capital.
- Alternate Valuation- Potential based valuations could be offered by informed investors rather than benchmarking with matured large Corporates on the mainboard.
What is a procedure for listing in SME Exchange?
- First of all, compliances need to be done for last 3 years
- All Balance sheet and Profit and loss account shall be proper for last 3 years
- All pending cases against the company must be disclosed
- Promoters and directors background, education, experience, KYC etc.
- Prospectus of company need to be prepared
- Prospectus need to be filed with BSE
- BSE send some inspector to company for inspection to check company is not bogus.
- After BSE gives approval, you can bring IPO online on website of BSE after printing prospectus
- Minimum 50 shareholders are required during issue i.e. minimum 50 applications must be received.
- You can collect maximum upto Rs 50 crore [Rs 2 crore to Rs 50 Crore], can’t collect in excess of same. Need to refund on pro rata basis.
- Within 5 days, listing is done and market trading starts
- Underwriters give assurance, in lieu of fees that whatever minimum subscription you want from public, if that is not achieved then underwriters will subscribe to those shares. In case of SME listing, 100% underwriting is compulsory.
- You can keep maximum 75% shares for promoter and owners, minimum 25% shares have to bring for public listing.
What is Difference between main board and SME Exchange Board?
|Parameter||SME Exchange||Main Board|
|IPO Application Size||Minimum Rs 1 lac||Rs 10,000- Rs 15,000
|Minimum number of Allottees||At least 50||At least 1000|
|Vetting of offer document/ Approval On Draft Red hearing Prospectus (DRHP)||By Exchange||By SEBI|
|IPO Underwriting||100% Underwritten (at least 15% of the issue size on the books of the merchant banker)||Not Mandatory (Under 50% compulsory subscription to QIB’s)|
|IPO Grading||Not Mandatory||Mandatory|
|Post issue paid up capital||Rs 3 crore||Rs 10 crore
|Post issue Reporting requirement||Half yearly||Yearly|
Compliance for SME Listing
- Full time company secretary (compliance officer) to be appointed.
- Infusing 50% independent director into the board.
- Website need to be maintained.
- Minimum application and lot size issued to public shall not be less than Rs 100,000.
- Underwriting- 100% underwriting by the underwriter. At least 15% of issue shall be underwritten by merchant banker or lead manager.
- Market making- Mandatory market making for 3 years. Minimum period of 1 year from date of their registration. Not more than 5 market maker. 2 way quotes for 75% of time during trading a day.
- Minimum public shareholding requirement- BSE listing agreement requires at least 25% of the post issue paid up capital to be with the “public” ( i.e other than promoter and promoter group). Example post issue capital = 1000. Minimum shares issued to public- 25% of 1000 i.e 250 shares.
Conditions for migration to main board
- The company should be listed and traded in BSE-SME for minimum 2 years
- Paid up capital shall not be less than Rs 10 crore and market capital shall not be less than Rs 25 crore
- Shareholder’s approval to be sought by passing special resolution
- Other eligibility criteria of main board to be fulfilled.
Time involved in SME IPO
Approx. 6 month to 1 year. In main board it takes approx. 2 years. So, in SME-IPO time involved is almost half.
No Loss of Control of promoter
When you go for IPO, company need to dilute 25% of equity. Therefore, company will issue fresh shares so that promoter equity becomes 75% and balance 25% goes to public. Also, shareholding of 51% is required to pass any resolution in the company. Therefore, promoter has complete control and voting power in the company even after IPO