Extend startup listing benefits to SMEs for easier funds; make VC funding accessible

Updated: September 16, 2019 6:31:11 PM

The stock exchange listing of a company not only increases avenues for raising further equity but it also provides quick recognition to an entity which otherwise might have taken ages through contemporary marketing strategies.

SMEs often are reluctant to opt for listing amid concerns such as increased disclosure requirement and compliance burden.

By Harish Kumar

As per the statistics, reported in the annual report of Ministry of Micro Small and Medium Enterprises for the financial year 2017-18, 63.38 million SMEs have evidently been playing a vital role in the overall growth of Indian economy. This includes contributing more than 28 per cent to GDP, providing employment to around 110 million people and contributing about 45 per cent to manufacturing output. However, despite having played such a strong role, SMEs remain vulnerable to several challenges amongst which one is timely and adequate availability of funds.

Broadly, for SMEs, the means for funding are debt or equity. Despite certain inherent disadvantages for debt funding (such as high interest, collateral, meeting credit rating criteria, poor debt-equity ratio etc.), SMEs in India prefer debt over equity financing due to certain obvious reasons such as unavailability of investors willing to fund early-stage equity capital and entrepreneurs’ concerns regarding dilution of control.

While the Government of India has taken measures time and again to provide easy debt access to SMEs, however, making available equity financing to SMEs still remains a challenge. The platform for listing of SMEs on BSE (christened as BSE SME) and NSE (christened as EMERGE) launched way back in 2012 is seen as one of the major steps taken so far by the government for making available equity financing to SMEs.

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The stock exchange listing of a company not only increases avenues for raising further equity but it also provides quick recognition to an entity which otherwise might have taken ages through contemporary marketing strategies. The equity funds so raised may also be used for repayment of debt resulting in a strong balance sheet and enhanced the financial soundness of a company. Collectively, all these factors, do help increase demand for the company’s shares which in turn increases the company’s valuation. Further, the availability of a trading platform invariably attracts investors as it enhances liquidity and provides a convenient exit route.

It has, however, been seen that SMEs often are reluctant to opt for listing amid concerns such as increased disclosure requirement and compliance burden. This is evident given that since the launch of SME listing platforms in 2012 only about 400 SMEs have been listed on BSE and NSE. These concerns of SMEs, in a way, are not baseless.

To begin with, although Regulation 15 of SEBI (Listing Obligation and Disclosure Requirement) Regulation, 2015 (“Listing Regulations”) exempts SMEs from several corporate governance provisions, however, no such relaxation has been provided under the Companies Act, 2013 (“Companies Act”). A company (including SME) having any of its securities listed on any recognized stock exchange is considered as a listed company under the Companies Act and is thus required to adhere to all compliances which are applicable on listed companies.

Further, it has been seen that in the past few years the government has provided various relaxations to startups from the provisions of Companies Act and Foreign Exchange Management Act, 1999 (“FEMA”) to enable them to raise equity funds such as liberalized issuance of sweat equity shares, employee stock options, issuance of equity shares with differential voting rights, permission to issue convertible notes under FEMA etc. Extension of similar benefits to SMEs would facilitate the flow of funds to this sector as well. Additionally, the government need to focus on taking effective measures so that enough avenues are opened for SMEs to have easy access to the angel, venture capital and seed funding.

This would shift the burden of finance for SMEs from debt to equity which would result in their overall and long-term growth. Given that SMEs are the backbone of Indian economy such steps would indeed aid the Government aspiring target of becoming $5 trillion economy by 2024.

(Harish Kumar is the Partner at L&L Partners. Views expressed are the author’s own.)

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