Avenue of Capital Raising for Startups

Avenue of Capital Raising for Startups Manu Thomas Sr. Manager, Listing Compliance, BSE Ltd. Capital Market Week Program - Jun. 2, 2015 1 Definit...
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Avenue of Capital Raising for Startups

Manu Thomas Sr. Manager, Listing Compliance, BSE Ltd.

Capital Market Week Program - Jun. 2, 2015

1

Definition of SME Classification of Micro, Small and Medium Enterprises As per Micro, Small & Medium Enterprises Development (MSMED) Act, 2006

As per SEBI ICDR Regulation, it is defined based on Post Issue paid up capital of the Company

2

Robustness of SME Industry Despite two global crises of 2008 and 2011, India’s avg. GDP increased from 7.6% in 10th 5 year plan (2002-2007) to 7.9% in the 11th 5 year plan (2007-12) thanks to the SME Sector which consistently registered higher growth

than the overall growth of the industry i.e. by an average growth of 13% every year in the 11th 5 year plan 3

Contribution by SMEs to the Indian Economy

 8.72% of Country’s GDP  45% of manufacturing output  40% of Exports  Employs about 7 crore people in over 260 lakh units  SME sector growing at over 8% per year  50% of SMEs owned by disadvantaged group of society

4

Fund raising challenges of Startups  After own funding, Bank Finance is by and far the largest source of Financing for the SMEs at the startup stage

 Banks have become increasingly constrained in their ability to lend money to high risk areas which includes ventures or start-ups  Banks has to match risks of funding as against the returns SME offers coupled with high debt equity ratio  Almost impossible to assess the correct valuation of startups which are in a new business segment  Cost of fund and time for each investment for the startups is very high  Startups complain about the stringent conditions  There is a need for funding for SME through alternative sources - Capital Market 5

Advantages of fund raising through Cap. Market for startups  Entrepreneur - Platform to raise Capital

 Non-retail Investors – Opportunity to invest at nascent stage in prospective future, protect their interest by ensuring full disclosures  Company - Unleash its valuation, tradable currency, liquidity  Retail Investor : – tax benefit in terms of long term capital gain due to STT – Safety as there is 3 year mandatory Market Making  Employees – another avenue to incentivise employees by ESOPS / ESPS  Economy – Mobilize savings for economic development  Exchange – can effectively discharge its role as an important MII 6

Avenues of Capital raising for startups SEBI has taken various steps in the recent past to enable Start-ups and SME to raise funds through various routes such as i) SME Segment – Introduced Chapter XA on Apr. 13, 2010 ii) Institutional Trading Platform – Introduced Chapter XC on Oct 8, 2013 iii) Alternate Capital Raising Platform (ACRP) –Discussion Paper Apr. 2015 iv) Crowdfunding (Consultation Paper) - Jun 17, 2014

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A(i)

SME Platform

Regulatory requirement  Mandatory – Post Issue face value capital up to Rs. 10 crores  Optional - Post Issue face value capital < Rs. 10 crores up to Rs. 25 crores  Market Making – Mandatory for 3 yrs from listing date. MB to be responsible for market making effort thru registered MMs  Underwriting – 100% of the offer of which at least 15% by Lead Manager

 Net Issue Size – Min. 25% of Post Issue face value capital.  Min. Application Size & Trading lot – Rs. 1 lakh  Number of allottees – Min. 50

9

Migration from SME Platform to Main Board 

Any SME on BSE SME Platform having a paid up capital more than Rs. 10 crores can move to the main board provided that the special resolution is passed in the AGM in favor with at least two third of the number of votes cast by the public shareholders and then apply to BSE SME.

 The SME migrating to the main board has to – Complete 2 yrs of listing on the SME segment – comply with all the main board norms like minimum 500 investors – Pay main board listing fees – Comply quarterly compliance etc.

10

SME platform V/s Main board listing – regulatory aspect  SEBI approval not required unlike for Main Board listing

 BSE has suo moto set up LAC and also instituted mandatory Site Visits  Minimum of 50 investors required instead of 1000 in other public issues  Lower eligibility norms compared to main board – exemptions under ICDR Reg.

 Post issue paid-up capital min Rs.3 crore & max Rs. 25 crores - compared to threshold of Rs.10 crores in normal IPOs  Simplified compliance - Half yearly reporting instead of Quarterly

 Abridged version of Annual Report instead of entire Annual Report  Compulsory Market Making unlike in Main board

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BSE Eligibility Criteria for Listing on SME  Net Tangible Assets – Min. Rs. 3 crore  Net worth – Min. Rs. 3 crores (Ex. Revaluation reserves)  Distributable profits – Min. 2 yrs out of preceding 3 FYs (of min. 12 months) Or pre issue Net worth – Min. Rs 5 crores  Post-issue paid up capital – Min. Rs. 3 crores  No change in promoters in the preceding 1 yr from date of filing with BSE  Mandatory trading in demat mode, signing with depositories  Mandatory to have Company website and site visit done  Certificate from applicant company / promoting companies – a) The Company has not been referred to BIFR (where company has emerged out of BIFR status - they are allowed) b) No winding up petition against company as accepted by a court  Promoters required to attend interview with Listing Advisory Committee 12

Statistics-SME Platform 13

14 12 10

9

9 8 7

8

BSE

NSE

SMEs Listed

93

7

Market-share

93%

7%

* As on 31st May 15

6

3

4 2

No. of Issues

11

1

1

0

1 0

0

0

0 Q2'14

Q3'14

Q4'14

Q1'15

Q2'15

Q3'15

Q4'15



Number of companies listed so far = 93



Number of SME Companies migrated to Main Board = 4



No. of companies where approval has been given – 9/ No. of companies where DRHPs have been filed and waiting for approval – 14



Total funds raised by 93 companies – Rs. 708.75 Crores



Total Market Capitalisation – Rs. 8358.50 Crores



Number of Market Makers registered with BSE SME – 89



SME IPO index launched on 14th December 2012 with 100 as base (Value as on 29th May 2015 –942.29) 13