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SMEs SMEs are those enterprises having investments in plant and machinery not exceeding Rs. 10 Crores.

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SMEs IN INDIA

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FINANCE IS IMPORTANT  FINANCE IS LIKE FUEL FOR A BUSINESS.  FINANCE IS A RAW MATERIAL.  FINANCE IN A BUSINESS IS LIKE BLOOD

IN A BODY.  FINANCIAL DECISIONS AFFECT MOST PARTS OF THE BUSINESS.  FINANCE-A COMPETITIVE ADVANTAGE OR DISADVANTAGE.  FINANCE- THE INTANGIBLE INFRASTRUCTURE.  SURVIVAL OF THE FITTEST IN THE GLOBAL VILLAGE.

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WHAT IS TYPICAL OF SME FINANCING?     

     

PROPRIETOR’S/PARTNERS’/ DIRECTORS CAPITAL. WORKING CAPITAL LOANS FROM BANKS. TERM LOANS FROM BANKS. PROPERTY MORTGAGE LOANS. PROMOTERS/ FAMILY MEMBERS HAVE GIVEN PERSONAL GUARANTEES. COLLATERAL SECURITY OF PERSONAL ASSETS HAVE BEEN GIVEN. MANY BORROWINGS ARE SHORT-TERM IN NATURE AND/OR PAYABLE ON DEMAND. MANY ARE FROM CO-OPERATIVE BANKS. RATES OF INTEREST ARE GENERALLY HIGHER. FINANCING BASED ON PERSONAL REPUTATION AND ACQUAINTANCE. FINANCING FROM FRIENDS AND RELATIVES OR ACQUAINTANCES. 5

Financial Needs of SMEs  SMEs being small or medium enterprises, need finance for

growth as well as for existing operations.  However, being small or medium enterprises, they face

problems in raising funds, providing securities and creating credibility in market.  Bank finance is at high cost and is linked with equity capital.  Servicing of debt is a problem for some SMEs.  Many SMEs are starved of capital.

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SME INITIATIVE OF GOVERNMENT  To comply with the lengthy requirements of funds to be raised

through Equity is not easy for SMEs.

 Hence Government and Prime Minister’s Task Force suggested to

set up some platform for SMEs and hence SEBI took initiative for easy mechanism for SMEs fund raising and formulated rules for SME Exchange/platform.

 SEBI had laid down the framework (on November 5, 2008) for

recognition and supervision of stock exchanges/platforms of stock exchanges for small and medium enterprises (SMEs ).

 Bombay Stock Exchange took the initiative and introduced BSE

SME Platform to allow SMEs to take advantage of the same and raise finance from general public.

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 In order to lay down the policy for issue, listing and

trading of the securities issued by the SMEs, necessary amendments have been made in the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009, SEBI (Merchant Bankers) Regulations, 1992, SEBI (Foreign Institutional Investors) Regulations, 1995, SEBI (Venture Capital Funds) Regulations, 1996, SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 and SEBI (Stock Brokers and Subbrokers) Regulations, 1992.  Listing means registration of a company on a

recognised stock exchange which allows trading of shares of a company on a stock exchange. 8

WHY SME LISTING? SMEs generally face the problems of raising funds at lower costs. Equity may be less costly than any other financial arrangement. Listing on the SME Exchange helps in solving this problem of raising capital. SMEs can now resort to equity financing through SME listing which helps in reducing dependence on debt funds leading to lower financing cost.

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WHY SME LISTING? Listing provides larger participation in a company’s equity by many types of investors. It would also help in reducing reluctance on the part of venture capitalists as they have an exit option and as such their lock-in period is reduced. 10

WHY SME LISTING? And thus brings employees loyalty and commitment through ownership feeling and value appreciation which leads to better performance and success of a business.

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WHY SME LISTING? - As a company will not be hampered by shortage of money or loan and equity crunch and thus would help it in developing new products and technologies and take risk.

- Development of market in company’s shares helps distribute risk efficiently by transfer of risk to those who are best able to bear it.

Media coverage will result in greater public awareness and enhance the credibility of the company which in turn would attract diversified group of investors.

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WHY SME LISTING? As a company will not be hampered by shortage of money or loan and equity crunch and thus would help it in developing new products and technologies and take risk.

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SME Fund Raising Stages Migrate to Main Board

SME IPO

Venture Capital Promoters Funding 14

Gearing up

for SME Listing

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CHANGE OF MIND SET  Small and Medium enterprises have the mindset of ME rather

     

  

than WE or COMPANY. When the Company wants to go public, it needs to think universal. Focus needs to be shifted from Governing to Governance. Ownership to Sharing. Tax Savings to Tax Paying. Focus to shift from owners to all stake holders. Stake holders are the most important part of any organization and they are to be paid back positively. Focus on valuation and wealth creation for all. Transformation of Promoters. Preparedness for transparency, shared decision making and compliance. 16

VARIOUS MODES OF RAISING CAPITAL BY A COMPANY

Public Issue by an Unlisted Company

Right Issue by an Unlisted Company

Offer for Sale of existing Shareholders of an Unlisted Company

Preferenti al Issue by an Unlisted Company

Right Issue by a Listed Company

FPO by a Listed Company Preferenti al Issue by a Listed Company

InterNational Offering

QIP by a Listed Company 17

ENTERING THE BIG LEAGUE  WHY SMALL REMAINS SMALL?  BREAKING THE CYCLE.  THINKING, STRATAGISING AND EXECUTING.  BECOMING BIG.  LISTING IS AN IMPORTANT STRATEGIC STEP IN A

COMPANY’S LONG TERM PLAN AND REQUIRES CAREFUL CONSIDERATION OF A NUMBER OF FACTORS BEFORE EMBARKING ON THE PROCESS. 18

PURPOSES FOR WHICH CAPITAL CAN BE RAISED THROUGH IPO  NEW PROJECT, EXPANSION, DIVERSIFICATION, FORWARD

OR BACKWARD INTEGRATION.  LONG-TERM WORKING CAPITAL.  ACQUISITION OF BUSINESSES, COMPANIES, BRANDS OR

OTHER ASSETS.  INVESTMENTS IN SUBSIDIARIES.  REPAYMENT OF LIABILITIES.

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WHO CAN LIST ON BSE SME?  An issuer whose post-issue face value capital does not exceed ten

crore rupees shall issue its specified securities in accordance with provisions of Chapter XB of ICDR Regulations.  An issuer, whose post-issue face value capital is more than ten crore rupees and up to twenty five crore rupees, may also issue specified securities in accordance with provisions of Chapter XB of ICDR Regulations. .  The provisions of these regulations, in respect of the matters not specifically dealt or excluded under this Chapter, shall mutatis mutandis apply to any issue of specified securities under this Chapter.  Provided that provisions of sub-regulations (1), (2) and (3) of regulation 6, regulation 7, regulation 8, regulation 9, regulation 10, regulation 25, regulation 26, regulation 27 and sub-regulation (1) of regulation 49 of these regulations shall not apply to an issue of specified securities made under this Chapter. 20

Which Exchange ? MAIN BOARD 25 Crore

SME OR MAIN BOARD 10 Crore

SME 1 Crore Paid-up Capital (Rs.)

Exchange

Eligibility Criteria of BSE SME  Net Tangible assets of at least Rs. 1 Crore as per the latest audited  

 

 



financial results. Net Worth (excluding revaluation reserves) of at least Rs. 1 Crore as per the latest audited financial results. Track record of distributable profits in terms of Sec. 205 of the Companies Act, 1956 for at least two years out of immediately preceding three financial years of period of at least 12 months (if criteria not met, then net worth should be at least Rs. 3 Crores) Post-issue paid up capital of at least Rs. 1 Crore. Company shall mandatorily facilitate trading in demat form. Mandatory to have website of the company. Certificate from the company as to - Company has not been referred to BIFR - No winding-up petition against company accepted by a court Promoters to attend an interview with the Listing Advisory Committee

OTHER REQUIREMENTS  The minimum application size in IPO in terms of

no. of specified securities and trading lot size shall not be less than Rs. 1,00,000/-.  Minimum 50 investors are required and each

should invest at least Rs. 1,00,000/- at the time of IPO. (Compared to 1,000 minimum investors required for BSE Main exchange) 23

MARKET MAKING  Merchant banker shall ensure compulsory market making in the shares of

the issuer, through the stock brokers of SME Exchange in the manner specified by SEBI for a minimum period of 3 years from the date of listing or date of migration to SME exchange.  Inventory of the market maker as on the date of allotment of the specified

securities shall be at least 5% of the specified securities proposed to be listed on SME Exchange.  Not more than 5 market makers are allowed for one script.  Market makers may compete with other market makers.  Minimum trading lot is of Rs. 1 lakh.  Bid and Ask spread to be decided by the exchange.

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MARKET MAKING  Market maker shall not buy shares from the promoters or persons

belonging to the promoter group for any person who has accepted shares from such promoter or promoter group during the compulsory market making period.  Market makers shall be required to provide two way quotes for 75% of

the time in a day and the same shall be monitored by the Exchange.  Market Makers are allowed to de-register by giving a minimum period

notice to the Exchange.  Promoters can not offer their holdings to the market makers during the

compulsory market making period., however promoters holding which is not locked-in can be traded with prior permission of the SME exchange in the manner specified by SEBI.  Takeover Regulations are not applicable to the Market Makers for a

period of 3 years from the date of listing.

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RELAXATIONS FOR SME LISTING  Requirement of three years out of preceding five years profit

making track record, net tangible assets of Rs. 3 Crores in preceding three years and net worth of at least Rs. 1 crore in preceding three years has been waived off for listing of SMEs.  SEBI approval to DRHP not required.  Lower initial and annual listing fees.  In principle approval from stock exchange is not required.  Some of the documents, as required under normal route, not

required to be filed with SEBI.

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RELAXATIONS FOR SME LISTING  Instead of quarterly results to be published

– listed SMEs can publish half yearly results.  Instead of entire annual reports – abridged

version of annual report can be sent to the shareholders or even a soft copy of the annual report made available on the website will be sufficient. 27

Migration to and from SME Platform  The Main Board Companies may migrate to the SME Exchange provided their paid up capital is less than Rs. 25 crores and if its shareholders approve such migration by special resolution through postal ballot and such issuer fulfills the eligibility criteria for listing laid down by the SME Exchange.  SME Exchange companies may migrate to the main board, provided their paid up capital exceeds Rs. 10 crores and up to Rs. 25 Crores and if its shareholders approve such migration by special resolution through postal ballot and such issuer fulfills eligibility criteria for listing laid down by the Main Board.  Where the post-issue paid-up value capital of an SME exchange company is likely to increase beyond 25 Crores, it shall migrate to the Main Board and if its shareholders approve such migration by special resolution through postal ballot and such issuer fulfills eligibility criteria for listing laid down by the Main Board. .

 In all the above cases, approval of the non-promoter shareholders is required by at least two third majority.

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SME IPO Activity Chart Pre-Incorporation/ Conversion/ Restructuring Activity Incorporation/ Conversion/ Restructuring Pre-IPO Activity

Red Herring Prospectus / Other Documents

SEBI Filing

ROC Clearances Distribution and Publicity

Appointment of Lead Manager / Underwriters/ Syndicate Members

Due Diligence

BSE / SME Clearances

Listing Application

Public Issue / Book Building Price Discovery

Allotment Listing

GEARING UP FOR SME LISTING  Conversion of the proprietorship/firm/private limited company into

  

  



a public limited company. Slum sale or part IX conversion or transfer under section 47 of the Income Tax Act. Mergers and amalgamations and carve outs of group entities. Stamp duties, income taxes, VAT and transaction costs associated with restructuring. Restructure capital so as to comply with the regulations and requirements of raising equity capital through IPO. Understand promoter contribution provisions and lock-in provisions. Arrangement for trademarks and brands. Revisit accounting policies and recast accounts. 30

GEARING UP FOR SME LISTING  Revisit related party transactions.  Consider segment wise reporting and consolidation of accounts if

applicable.  Consider preparation of audited cash flows .  Understand minimum public offer norms.  Appointment of managerial personnel.  Consider the Companies Act provisions applicable to Public

limited companies.  Consider broad basing of the Board of Directors.

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GEARING UP FOR SME LISTING - Selection of Merchant Banker. - Restructuring of capital and valuation. - Due Diligence as part of IPO. - Offer Document for IPO. - Marketing Strategy. - Effective communication of the corporate and its equity strength. 32

GEARING UP FOR SME LISTING

- Various approvals that a company requires. - Applicability of various regulations. - Risk factors associated with the company. - External Environment of the company. - Various litigations have to be listed out and their relative magnitude to be analysed by the Issuer. 33

GEARING UP FOR SME LISTING - Sustained Media effort, regular interaction with the

brokers, large institutional investors, etc to create awareness about public issue.

- Well positioning of industry news and story relating to

the company.

- Proper selection of bidding centres by identifying

investors’ centres and brokers.

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CORPORATE GOVERNANCE

Optimum combination of executive and non-executive director with not less than 50% of directors comprising of non-executive directors. If the chairman is an executive director or belongs to promoter group, at least 50% of directors should be independent directors.

Qualified and independent audit committee. Minimum three directors as members, two-third of which shall be independent directors.

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- Related Party Transactions. - Disclosure of Accounting Treatment. - Risk Management. - Remuneration, MDA and shareholders related. - Review of financial statements and CFS. - Accept responsibility for Internal Controls. - Intimation to auditor and audit committee regarding significant changes, instance of fraud, etc. - Company shall submit a half yearly compliance report to the stock exchange. - Annual Report shall contain a separate section containing the corporate governance report.

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- Company shall obtain a certificate from

auditors of the company or Practicing Company Secretary regarding compliance of conditions of corporate governance

- Remuneration Committee of Board of -

Directors. Half yearly report about financial performance and significant events to the shareholders. Training of Board members. Performance Evaluation of non-executive directors. Whistle Blower Policy.

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Estimated Cost Schedule of SME IPO PARTICULARS

SCENARIO 1 Rs. 10 Crore ( Amt in Rs.)

SCENARIO 2 Rs. 20 Crore ( Amt in Rs.)

15,00,000

30,00,000

a. Fees Payable to Lead Managers (1.5% of the issue size)

b. Fees payable to Underwriters (1.5% of the issue size)

15,00,000

(2.5% of the issue size) c. Filling fees of Prospectus with SEBI

50,00,000 25,000

50,000

d. Stamp duty & Filling fees for Increasing Authorised Capital

2,00,000

5,00,000

e. Brokerage / selling commission payable to Brokers/syndicate /sub-syndicate members (1.5% of the issue size)

15,00,000

30,00,000

0.025% of issue size

Estimated Cost Schedule of Public Issue PARTICULARS

SCENARIO 1 Rs. 10 Crore ( Amt in Rs.)

SCENARIO 2 Rs. 20 Crore ( Amt in Rs.)

f. Fees payable to Registrar to the Issue

1,00,000

2,00,000

g. Fees payable to Advisors, Auditors, etc.

5,00,000

7,00,000

h. Lawyers fees

5,00,000

7,00,000

i. Advertisement for Public Issue

3,00,000

4,50,000

j. Printing of Prospectus (1,000 copies @ Rs. 20/- per copy)

20,000

(2,000 copies @ Rs. 15/- per copy)

30,000

k. Printing of Share Application Forms (1,00,000 copies @ Rs. 2.50 per copy)

2,50,000

(2,00,000 copies @ Rs. 2.00 per copy) l. Press, Brokers, Investors Conferences

4,00,000 2,00,000

4,00,000

Estimated Cost Schedule of Public Issue PARTICULARS

SCENARIO 1 Rs. 10 Crore ( Amt in Rs.)

SCENARIO 2 Rs. 20 Crore ( Amt in Rs.)

1,00,000

2,00,000

2,00,000

4,00,000

2,00,000

3,00,000

p. Market Makers Fees

15,00,000

30,00,000

q. IPO Grading Fees

1,50,000

2,00,000

50,000

50,000

87,,95,000

1,85,80,000

8.80%

9.30%

m. Other out of Pocket Expenses like conveyance, telephone, fax, stamp duty, postage/courier, other promotional expenses, stationery, etc. n. Miscellaneous, Unexpected expenses o. Trading Platform fees (only in case of Book Building)

r. Listing Fees at SME Total

Percentage of the Issue Size

POST LISTING THREATS AND TAKEOVERS  Compliance with SEBI Insider Trading Regulations.  Compliance with listing agreement.  Compliance with other SEBI Regulations and SCRA.  SEBI (Substantial Acquisition of Shares and Takeovers )

Regulations, 2011.  Creeping acquisitions.  Compulsory and voluntary open offer.

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……AND THE JOURNEY BEGINS……

THANK YOU 42