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SME Listing: Raising Capital by Small and Medium Enterprises

In a developing country like India there is an abundance of talent and potential, however many a time such talent and resources are not optimally utilized due to lack of funds available with the entrepreneurs to utilize such potential market peerlessly.

Raising capital in India is a difficult task for small and medium entrepreneurs, the sector is far deprived of direct access to public funding through capital markets. Realizing the Importance of the SME sector in the economy and the lack of capital resources available to them, SEBI came up with Chapter XA in SEBI (Issue of Capital and Disclosure Requirements) (Third Amendment) Regulations, 2010, wherein detailed provisions are laid down as to issue and listing of securities by SMEs; a separate window of the main exchange was envisaged along with relaxation in ICDR Regulations.

At present, there are only two SME Exchanges in India i.e.; BSE SME platform (BSE) and EMERGE Platform (NSE) and both have their own eligibility criteria for SME listing in addition to the SEBI Guidelines provided for the Listing.

Introduction

As per the rules and regulations laid down by SEBI, SME Platform offers an entrepreneur and investor-friendly environment, which enables the listing of SMEs from the unorganized sector scattered throughout India, into a regulated and organized sector.

“SME Exchange” is defined in Chapter XB of the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations as a trading platform of a recognized stock exchange or a dedicated exchange permitted by SEBI to list the securities issued in accordance with Chapter XA of SEBI (ICDR) Regulations and this excludes the Main Board (which in turn is defined as a recognized stock exchange having nationwide trading terminals, other than SME exchange).

Applicable Acts:

 Companies Act, 2013

  1. Securities Contracts (Regulations) Act, 1956
  2. SEBI (Prohibition of Insider Trading) Regulations, 2015
  3. SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018
  4. SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011
  5. Securities and Exchange Board of India Act, 1992
  6. SEBI (Listing Obligation and Disclosure Requirement) Regulations, 2015

Eligibility criteria for listing on NSE Emerge Platform

The following criteria should be complied with as on the date of filing the Public Offer Document with NSE as well as when the same is filed with ROC and SEBI.

PARAMETER LISTING CRITERION
INCORPORATION 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.
TRACK RECORD ·        Track record of at least 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 held 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 at least any 2 out of 3 financial years preceding the application and its net-worth should be positive.

OTHER LISTING CONDITIONS ·        (i) 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

·        (ii) The company has not received any winding up petition admitted by an NCLT / Court.

·        (iii) No material regulatory or disciplinary action by a stock exchange or regulatory authority in the past three years against the applicant company.

UNDERWRITING The issue shall be 100% underwritten and Merchant Bankers shall underwrite 15% in their own account.
DISCLOSURES 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 the 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 the alleged commission of any offense by any of its directors and its effect on the business of the company, where all or any of the directors of the issuer have or has been charge-sheeted with serious crimes like murder, rape, forgery, economic offenses.

The applicable listing fee for the NSE Emerge Platform is as follows:

LISTING FEES STRUCTURE AMOUNT (Rs.)
Processing Fees 25,000
Initial Listing Fees 25,000
ANNUAL LISTING FEES (BASED ON PAID UP CAPITAL)
Up to ₹5 Crore 10,000
Above 5 Crore and up to 10 Crores 15,000
Above 10 Crore and up to 20 Crores 25,000
Above 20 Crore and up to 25 Crores 45,000

Eligibility criteria for Listing on BSE SME

 

PARAMETER LISTING CRITERION
INCORPORATION 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.
NETWORTH

 

The Company should have a positive net worth.

 

TANGIBLE ASSET Net Tangible Assets should be Rs 1.5 Crore.
TRACK RECORD §  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.

OR

§  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 mainboard or SME board of the Exchange.

 

§  The company or the firm or the firm which has been converted into the company should have combined positive cash accruals (earnings before depreciation and tax) in any of the years out of the last three years and its net worth should be positive.

OTHER REQUIREMENTS

 

·     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.

DISCLOSURES A certificate from the applicant company / promoting companies stating the following:

a) The Company has not been referred to the Board for Industrial and Financial Reconstruction (BIFR).”

Note: Cases, where the company is out of BIFR, is allowed.

b) There is no winding-up petition against the company, which has been admitted by the court or a liquidator has not been appointed.

UNDERWRITING The issue shall be 100% underwritten and Merchant Bankers shall underwrite 15% in their own account.

The applicable listing fee for the BSE SME Platform is as follows:

BSE has set the annual fees for the Companies listed on the basis of market capitalization rather than the issue size. The fees for listing prescribed by BSE:

LISTING FEES STRUCTURE AMOUNT (Rs.)
One-time Listing Fees: 50,000
The Annual Fees is Rs 25,000/- or 0.01% of full market capitalization, whichever is higher.
A fee of INR 2.5 Lakh for use of Book Building software in case of an issue size up to INR 25

Crore, and INR 4 Lakh in case of an issue size above INR 25 Crore

SME Exchange

Essential Requirements:

 One or more merchant Banker(s) has to be appointed, registered with the SEBI, as lead managers to the issue.

  1. The issuer Company can make applications to one or more SME exchanges and choose one of them as Designated Stock Exchange.
  2. Syndicate member(s) has to be appointed, in case issue is through the book-building process and in case of any other issue, appoint Banker to issue, at center as specified by ICDR Regulations.
  3. Issuer Company shall deposit a Security Deposit of 1% of the total issue size available for subscription to the Public with the designated Stock Exchange.
  4. Pricing has to be done either by fixed price (price or price band) or through the Book Building Process (floor price or price band).

*The floor price or Final Price shall not be lower than the face value of the Equity Shares.

  1. Existing partly paid-up equity capital has to be either made fully paid-up or forfeited.
  2. The shareholding of the promoter has to be in dematerialized form.
  3. An Agreement has to be entered with the RTA.
  4. An Agreement with the Depositories NSDL & CDSL and receipt of ISIN has to be entered.
  5. If required an increase in the Authorized Share Capital of the Company has to be made.
  6. The logo of the Company has to be registered under the Registered Trademark.
  7. Statutory Auditor is to be Peer Reviewed Certified from ICAI.
  8. A website of the company with all the required information as per SEBI (LODR) Regulations, 2015 has to be created.
  9. The previous year’s financials shall be re-audited by a peer review auditor.
  10. Board and Committee as per SEBI LODR i.e.; Audit Committee, Stakeholder Relationship Committee, and Nomination and Remuneration Committee have to be constituted.
  11. Independent Director, Whole Time Director, Company Secretary, and Chief Financial Officer have to be appointed as may be required under the Act.

Other Aspects:

The issue shall be subject to the applicable minimum promoter’s contribution together with the required lock-in period.

  1. Allocation of a net offer between Retail Individuals Investors, Non-Institutional buyer, and Qualified Institutional Buyer shall be in terms of the applicable regulation.
  2. The minimum offer to the Public shall be 25% of the total post issued capital.

The main 5 P’S of Listing Process on SME

  • Planning

The Issuer Company consults and appoints the Merchant Banker/s in an advisory capacity.

  • Preparation

The Merchant Banker prepares the documentation for filing after:

  • conducting due diligence regarding the Company i.e.; checking the documentation including all the financial documents, material contracts, Government Approvals, Promoter details etc.
  • and planning the IPO structure, share issuances, and financial requirements.
  • Process

Application procedure:

Submission of draft red herring prospectus (DRHP)/Draft Prospectus – These documents are prepared by the Merchant Banker and filed with the Exchange as well as with SEBI as per requirements.

Verification & Site Visit – Stock exchange verifies the documents and processes the same. A visit to the company’s site shall be undertaken by the Exchange official. The Promoters are called for an interview with the Listing Advisory Committee.

Approval – Stock exchange issues an in-principle approval on the recommendation of the Committee, provided all the requirements are compiled by the Issuer Company.

Filing of red herring prospectus (RHP)/Prospectus – Merchant Banker files these documents with the ROC indicating the opening and closing date of the issue.

Once approval is received from the ROC, they intimate the Exchange regarding the opening dates of the issue along with the required documents.

  • Public Offering

The Initial Public Offer opens and closes as per schedule. After the closure of the IPO, the Company submits the documents as per the checklist to the Exchange for finalization of the basis of allotment.

  • Post Listing

Stock exchange finalizes the basis of allotment and issues the Notice regarding Listing and Trading.

Once the Company is listed on SME Exchange, it has to comply with Quarterly, Half-Yearly, and Annual Compliances as may be applicable on it under SEBI (LODR), 2015.

Difference Between Mainboard & SME Board

Basis Main Board SME Board
Offer Document Vetting By SEBI By Stock Exchange
Track Record Stringent norms Relaxed norms
Minimum Allottees in IPO The minimum number of allottees should be 1000 The minimum number of allottees should be 50
IPO Timeframe 6 months onwards 3 to 4 months
Reporting Requirement Quarterly Half-yearly
IPO Underwriting Non-Mandatory (Under 50% compulsory subscription to QIB’s) Mandatory (100% underwritten with Merchant Banker underwriting 15%)
Post-issue paid-up capital Minimum post issue paid-up capital of Rs 10 crore Maximum post-issue capital Rs 25 crore
Minimum IPO Application Size Rs 10,000 – Rs 15,000 Rs 1,00,000

 

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