Small business listings: Will SME exchanges continue to outshine main board this Diwali

Published: October 15, 2019 1:10:36 PM

In recent years, SME Exchanges have been buzzing with activities in comparison with the main boards. In the FY 2018 and 2019, a total of 261 SMEs were listed, while 123 were listed on the main boards of BSE and NSE.

SEBI permits an entity to make an IPO on dedicated SME Exchanges if its post-issue paid-up capital is less than or equal to Rs 10 crore.
  • By Geeta Dhania

Despite the MSME sector assiduously acting as the bulwark for the Indian economic structure, MSMEs continue to lack access to timely and adequate finance at a reasonable cost, which is essential for its growth. RBI through its Expert Committee Report (2019) has estimated that the overall credit gap in the MSME sector currently stands in the range of Rs 20-25 trillion. To bridge this, SMEs have been raising funds by publicly listing their equity on stock exchanges devoted to SMEs.

SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018, permits an entity to make an IPO on dedicated SME Exchanges if its post-issue paid-up capital is less than or equal to Rs 10 crore. Moreover, an entity with a post-issue paid-up capital above Rs 10 crore but below Rs 25 crore has the option to list on the main board or the SME Exchange. This also means that the access to SME Exchanges is not just limited to entities defined as MSMEs under the MSME Act, 2006, as per which the investment in the plant and machinery cannot exceed Rs 10 crores for an entity to be identified as an MSME. The companies listed on the SME Exchange are permitted to migrate to the main board once they satisfy the listing requirements of the main board. And, in case their post-issue paid-up capital exceeds Rs 25 crores, main board listing becomes mandatory.

SME Listing Buzz

World over, countries with sophisticated and developing capital markets have exchanges devoted to emerging companies: MOTHERS in Japan, SGX-Catalist in Singapore, TSX-Ventures in Canada, AIM in UK and ChiNext in China. Previously in India, we had the erstwhile OTCEI and INDONEXT as SME dedicated stock exchanges. In 2010, The Prime Minister’s Task Force recommended setting up of a dedicated Stock Exchange for SMEs, which was followed by SEBI finally permitting the existing stock exchanges to set up SME specific trading platforms having nationwide terminals.

In India, currently, two bourses (BSE and NSE) have dedicated exchanges for the SMEs. BSE, being the first one to have an SME platform in 2012, currently has 310 companies listed on its ‘BSE-SME’. Of these, 71 entities have exercised the option to migrate from BSE-SME to its main board. NSE followed in BSE’s footsteps and established ‘EMERGE’ which has over 180 SMEs. Of these, 22 entities have migrated from EMERGE to NSE’s main board.

In recent years, SME Exchanges have been buzzing with activities in comparison with the main boards. In the FY 2018 and 2019, a total of 261 SMEs were listed, while 123 were listed on the main boards of BSE and NSE (IPOs, FPOs & OFS (SE)). In terms of market capitalization, the SMEs have been able to raise Rs 6,090 crores from the market since 2012 till September 30, 2019 (this includes IPOs and FPOs), with Rs. 2,255 crores and Rs 1,620 crores having been raised in FY 2018 and 2019 respectively alone. Closer to today, out of the five IPOs that hit the markets on September 30, 2019, three are SME IPOs.

Rise in Listings

On one hand, it is clear that SME listings have increased manifold over the last few years. This can be largely attributed to the ease and benefits of SME listings. For instance, minimum allottees required is 50 for SME listings, in contrast to 1,000 prospective allottees as mandated for a main board listing. This lower threshold helps the IPO bound SME to have a focused marketing approach and lower costs. Unlike Main Board listings, the offer documents for the IPO bound SME are vetted by the exchanges rather than by the securities market regulator, SEBI.

The short-term and long-term capital gains tax rates attracted for sale of securities listed on SME Exchanges is considerably lower than the tax rate applicable for the sale of unlisted securities. Further, corporate governance norms under the LODR Regulations, alternate valuation methods, track record, and financial reporting requirements are also more relaxed for SME listings.

Creating Awareness

On the other hand, while the public listing offers a myriad of benefits to SMEs and their stakeholders, SMEs have historically been shy of listing due to increased disclosure requirements and compliance burdens when compared to an unlisted company. For instance, Regulation 15(2) of the LODR Regulations provides relaxation in terms of compliance with certain corporate governance norms laid therein, for SME listings. Despite this relaxation, the requirements as per the Companies Act, 2013 for all listed companies continue to apply to a listed SME as well. Therefore, it becomes imperative to sensitize the promoters of SMEs of the long-term sustainable growth benefits of SME listings and how a listing can help in growth prospects for SMEs.

MSMEs have unremittingly acted as the sentinel for the Indian economy, providing it resilience to ward off global economic shocks and adversities. Accordingly, the markets and the regulators have reposed their faith in this sector’s capabilities by time and again introducing administrative and regulatory changes to harness its growth potential. With continuing support from the regulator and exchanges, coupled with investors backing and favourable government policies, it remains to be seen if SME Exchanges will continue to outshine the main board this Diwali.

(Geeta Dhania is a Partner at L&L Partners. Views expressed are the author’s own and purely informative in nature.)

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