Credit and Finance for MSMEs: "There is a need to create a lot of alternative investment funds (AIFs) that can invest in the equity of SMEs going for listing. To attract investment in SMEs, the government may formulate some policies to incentivize long-term investors in form of tax benefits."
Credit and Finance for MSMEs: Small business listing platform BSE SME has been awaiting the quintessential stock market buzz one would expect in a country with around 6.33 crore MSMEs. Over the past nine years, 336 SMEs have been able to list on the platform with a combined market cap of Rs 22,594 crore while 99 of them have been able to migrate to the main board. Then there is the BSE Startups platform for startups to list even as many of them have either already shifted or looking to shift their base abroad for easier listing norms and overall favourable regulatory environment However, head of BSE SME and BSE Startups Ajay Thakur is confident of gradually turning the two platforms around. “I can say with satisfaction today that SME platform has emerged as the most cost-effective platform for SMEs to raise funds and create visibility,” Thakur said in an interaction with Financial Express Online. Edited excerpts below:
336 SMEs listed on BSE SME since the latter’s launch in March 2012. Are you convinced of the exchange’s performance so far?
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In India financial literacy is still less and therefore most of the SMEs have not been able to understand the benefit of equity funding. In 2012 when the SME platform was launched, most of the market intermediaries were not so comfortable and people didn’t have confidence in its success as we have the precedent of failure of OTCEI. OTCEI was also an SME Exchange with similar guidelines as promulgated for the SME platform by SEBI in 2010. Besides this, the concept of market-making for three years and 100 per cent underwriting were introduced which were big responsibility on the shoulders of merchant bankers. At that time, merchant bankers were not prepared for this new concept. So, initially, we had to put lots of effort to convince the merchant bankers but slowly and gradually new breed of merchant bankers evolved and from 2015 onwards we saw the SME platform surging whereby these merchant bankers started getting SMEs listed.
So, a lot of toiling must have been involved to even get to the present level? Also, how it has been facing Covid headwinds?
I can say with satisfaction today that the SME platform has emerged as the most cost-effective platform for SMEs to raise funds and create visibility. It’s because of our consistent efforts that BSE SME has emerged as the largest SME platform in India. Companies are listed from 17 sectors and have raised nearly Rs 3,500 crores from the capital markets both through IPO and follow on. So overall the journey has been very exciting. These SMEs over the years have created market capitalisation of over Rs 22,000 crores. Yes, of course, we have put lots of effort to ensure that the SME platform becomes successful. We have organized almost 2200 seminars across the country in the last seven years. Even during this pandemic, we have organized 150 webinars to create awareness among SMEs about the benefit of equity funding and listing. Last year also because of our persistent efforts we have seen getting one company listed every month and in the startups segment, we have seen the listing of four startups. It is my pleasure to inform you that BSE SME became the first SME platform where 400 prospectuses have been filed by SMEs. There are still enough companies in the pipeline.
What are the sectors you see investors showing interest in?
Most of the SMEs across the sectors have shown keen interest in tapping the market to raise equity funds for their Capex or working capital requirement. Investors always look for a company having a healthy balance sheet, transparency, and scalable business. Also, they like the company where there is a unique business model. Going forward I am sure investors will show interest in the sectors like healthcare, pharma, FMCG, metals, IT, IT infrastructure, retail chain, and consultancy. We have seen some good development in these spaces.
Any relaxation in compliance for MSMEs on SME Board and for those who want to switch to the main board? Moreover, any Covid-induced steps in place to attract entities?
In fact, before framing the guidelines, SEBI has done a lot of deliberations with all stakeholders. It was always a consensus that there should be cost-effective and relax compliance requirements on the SME platform in comparison to main board. Hence, the provisions of SME Board has relaxed guidelines and compliance requirement so that SMEs can easily comply with the very low-cost burden. For example, on the SME platform, there is a requirement for the filing of half-yearly results and shareholding pattern. They are also not required to publish their results in the newspaper. As far as migration to main board is concerned, the company’s face value capital needs to be above Rs 10 crore and the market cap needs to be above Rs 25 crore. Besides that, the company has to take two-third non-promoter approval for migration to main board.
Also, during the pandemic, MSMEs were the ones that were most impacted. To help more and more SMEs access the capital market, we have taken a proactive decision and relaxed our eligibility criteria requirements for listing. We have relaxed the requirement of two years of profit out of the last three years to operating profit in any one of the last three years and reduced the requirement of the net tangible asset from Rs 3 crores to Rs 1.5 crores. We have further reduced the listing fee of the companies going for listing on the SME platform by 20 per cent.
There is the BSE Startups exchange as well. Has it been tougher for you to attract startups when most of them seem enamoured by VC funding?
India is the third-largest destination for startups. Approximately 41,000 startups are registered with DPIIT. A few of the startups get equity funding through an angel or venture capital and private equity investors, however, there are many who don’t have access to equity funding. In order to provide these startups access to the alternative route of funding has launched the first startup platform in India on December 22, 2018, and in August 2019 two startups got listed. In the last one and a half years, another seven startups got listed. There are more in the pipeline to file their prospectus on our startup platform. So, overall here also the progress is good. But with disruptions due to the pandemic, people are struggling, so there can be a little bit delay, but once things settle, I can see more and more startups coming in, filing prospectuses, and getting listed.
How has Covid impacted SME listings so far?
Preparing the prospectus requires lots of due diligence and paperwork on the part of the merchant banker. It’s the legal duty of merchant bankers and promoters to give full disclosure. These things take time. All the documentation and paperwork requirements on SME and main board are one and the same as far as making the prospectus is concerned. Last year we have experienced lockdown which has slowed down the progress and with the second wave of Covid, we are again experiencing huge disruptions which again going to slow down the filing of the prospectus. However, there is already interest in the SME companies in getting listed and the merchant bankers also want to bring more and more companies on the SME platform.
To expedite the process of listing in the outbreak of the second wave of Covid, we have relaxed the physical verification by BSE official of company official and factory premises till May 31, 2021. It’s now the duty of the promoters and the merchant bankers to send the video clip of the factory and the official premises and the supporting documents authenticated by the merchant banker, and the statutory auditor.
There are plans to set up a Rs 10,000 crore Fund of Funds through which up to 15 per cent of the amount raised by AAA-rated MSMEs from the capital market will be contributed by the government as equity. Your thoughts.
For the first time in the history of India, I have seen that the government focuses on equity funds for the growth of SMEs. So, the government has created a fund of fund where govt will be putting Rs 10,000 crore which will be further leveraged to the tune of Rs 50,000 crore. The MSME ministry is working along with various stakeholders for the early implementation of funds. I am sure it will provide a lot of impetus to SMEs in their growth. The sooner the fund is created, the better it will be for SMEs, which will get equity funding through this fund, to grow further.
Have you re-set your expectations for the current year as we see Covid overwhelming the country?
We received 25 prospectuses last year. Till a few days back with growth in the economy backed by increasing GST figures, we were expecting that we will be receiving 50 prospectuses in this financial year. However, with the second wave of Covid accompanied by lockdowns, we are of the view that the process may get slowed down. Still, I am sure that even in such circumstances, we will get at least 35 prospectus on our SME platform. There is a need to create a lot of alternative investment funds (AIFs) that can invest in the equity of SMEs going for listing. To attract investment in SMEs, the government may formulate some policies to incentivize long-term investors in form of tax benefits.