The Union Budget for the financial year 2013-14 presented by Mr. P. Chidambaram has been very significant for the small and medium enterprises (“SMEs”) and start-up companies (“Start-ups”) as it made a proposal of allowing the SMEs and the Start-ups to list on the Small and Medium Enterprises Exchange (“SME Exchange”) without being required to make an initial public offering (“IPO”) as long as issuances of securities is limited to ‘informed investors’. Therefore, it will in effect allow the SMEs and the Start-Ups to list shares issued on the basis of private placements to a maximum of 49 investors at a time, thereby providing a certain level of liquidity for early stage investments in SMEs and Start-ups. This will also give venture and private equity investors an additional exit route which they might find attractive.
Since the investors are supposed to be ‘informed investors’, this listing option is unlikely to be available where investors are retail individual investors or where the size of the investment is below a specified threshold. It is also likely that secondary market participation in such companies would be similarly restricted.
The Union Budget clarified that this listing on the stock exchanges shall be in addition to the SME platform in which listing can be done through an IPO. The SME exchange platform was developed by the SEBI to facilitate the SMEs in raising capital through dedicated stock exchanges and ease the process of listing on the stock exchanges.
SEBI inserted Chapter XA namely “Issue of Specified Securities by Small and Medium Enterprises” in the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 (“ICDR 2009”) for laying the guidelines for listing of SMEs on SME stock exchanges. Prior to this, SEBI issued a circular and provided guidelines for setting up SME Exchanges in the country. Chapter XA relaxed the procedure and the eligibility criteria for making a public offer by the SMEs in comparison to the eligibility criteria and the procedure to be fulfilled by a company for listing in a main stock exchange.
SME Exchanges in India:
There are 2 (two) SME Exchanges in India namely BSE SME and NSE Emerge. There are 7 (seven) companies listed on the BSE SME and 2 (two) companies on NSE Emerge. Both the exchanges have prescribed their eligibility criteria for listing securities of SMEs.
The SME Exchanges did not receive the anticipated response from the companies. The reasons cited for such lukewarm response include the obligations to be fulfilled by the merchant bankers like 100% underwriting the issue and market making the issue for 3 (three) years. However, recently there are indications that the SEBI might amend these obligations and further ease the process of listing of SMEs. The objective of the new proposal in the Union Budget is to create easier accessibility to the capital for the fast growing SME sector in India, which would indirectly boost innovation and enterprise in the country. This objective is sought to be achieved by significantly enhancing liquidity for investors in such SMEs and Start-Ups by providing them a trading platform through listing with the SME Exchange. Certain developed and significant economies globally have already explored such routes of facilitation of capital market access.
SME exchanges in other countries:
London Stock Exchange has a separate platform for the growing small companies called AIM. There are over 3000 companies registered with AIM. However, it is not necessary for a company that has joined AIM to raise funds immediately after joining AIM and the companies may raise funds after joining the AIM.
Similarly, in China there is a separate platform for the innovative companies to raise funds through the ChiNext platform of the Shenzen Stock exchange. There are 281 companies listed on the ChiNext.
The GEM stock exchange in Hong Kong is a stock exchange for the growth companies and the informed investor which provides the investors opportunity to invest in the high risk growth companies and at the same time provides good platform to the growth companies from obtaining capital.
The growth spurt in the SME and Start-Up sector in India, in the recent years, have repeatedly faced obstacles with regards to easy accessibility to capital. Start-ups generally do not have large equity base and is driven by professional promoters with low or limited access to capital. The high cost of debt along with large collateral requirements and the nascent corporate bond market acts as deterrent to Start-ups or SMEs leveraging their capital.
Traditionally the Start-up and SME sector in India has been helped by incubation centres, angel investors (high net worth individuals) and sector focussed venture capital funds. In this regard, this Union Budget has also mentioned that SEBI would be registering angel investors as ‘category I AIF’ (Alternative Investment Fund Regulations), which has tax pass-through status. This is a move aimed at promoting and regulating angel investors and expanding the access of funds to the Start-Ups and SMEs.
The new focus of the Union Budget on Start-ups and SME segment is certainly a positive development. However, it is possible that this initiative could also be a damp squib like IPOs for SMEs if SEBI prescribes regulations that are not market friendly. It is hoped that SEBI will take into account the previous experience with SME IPOs and the new regime would facilitate access to both equity and debt market to truly promote innovation and enterprise in the country.
It is expected that more detailed guidelines in this respect will be notified shortly. Watch this space for more details
Thomas Philippe [firstname.lastname@example.org]
Souvik Bhadra [email@example.com]
Pingal Khan [firstname.lastname@example.org]