Raising capital: Why SME IPO may be a good choice for small businesses
Small companies dream of getting themselves listed on the stock exchanges, but they generally fall short.
Everyone has dreams and most of us want our dreams to come true. Similar to big companies, small companies also dream of getting themselves listed on the stock exchanges, but they generally fall short of meeting the eligibility criteria of the BSE and the NSE.
World over, governments have recognised the role and importance of the SMEs in their economy, which have become silent drivers of economic development. The biggest challenge being faced by these enterprises is access to capital.
To overcome this, almost all major capital markets have realised the need for a separate exchange for SME segment. More than 20 countries operate separate SME bourses. These markets have tried to create a SME friendly market architecture supported by effective institutions and forging links to policies that foster a new class of investable equities.
Recognising this aperture and that SMEs fetch the major pie of any country's industrial activity, the BSE and the NSE launched their platform for small and medium enterprises to list on the BSE and the NSE and later migrate to the main board of the BSE and NSE without the need to make an initial public offering . The BSE SME and NSE Emerge are a new source for SME IPOs and provide a listing opportunity to the SMEs with minimum compliances and cost compared to the main board. SMEs are spread across diverse sectors and are fast emerging as an alternate asset class for investors.
An SME exchange is a dedicated exchange or a trading platform for Small and Medium Enterprises. In India, an SME exchange functions within a recognized stock exchange or the main exchange such as the BSE Limited and the National Stock Exchange of India.
The framework for setting up of SME exchanges was first propagated by SEBI in 2008. However, a major step in this direction was the report by the Prime Minister's Task Force in January 2010 on Micro, Small and Medium Enterprises, which recommended setting up of SME exchanges to promote inflow of equity capital in this sector. Subsequently, in 2012, the BSE SME and NSE Emerge platforms were established.
SME listing not only provides benefits to the companies but also benefits its investors, both existing and proposed, such as providing an exit route to private equity investors as well as liquidity to the ESOP holding employees. Listing pre-supposes good corporate governance, which results in sustainability and helps generate an independent valuation of the company.
Listing raises a company's public profile with customers, suppliers, investors, financial institutions and the media and provides continuing liquidity to the shareholders.
Key differences between traditional Exchanges and SME Exchanges
So how is the BSE and NSE platform different than a SME platform? As we know, the BSE and the NSE platforms, where companies list their securities, are commonly known as the "main board". This platform is the primary platform where IPOs have been taking place for years. The BSE and the NSE have strict eligibility criteria, which must be adhered to list on their platforms.
On the other hand, the BSE SME and NSE Emerge platforms eligibility criteria are not so arduous. The differences in the eligibility criteria of the main board and the SME platforms are predominantly on the following parameters:
In addition to the above differences, the requirement of track record, cost, corporate governance norms, reporting requirements and time frame for listing are quite relaxed for an SME, making listing on an SME platform comparatively easier.
Why should startups explore IPOs on SME Exchanges
Globally, the IPO market has been sizzling with a new breed of e-commerce, social media and mobile technology firms making a debut. Not in India, though. Startups here, including Snapdeal, Flipkart, Paytm and InMobi have been knocking on the doors of private equity investors and studiously avoiding public markets. Although, these companies sell in India, they list overseas. Koovs is listed on AIM, a sub-market of the London Stock Exchange, the first Indian e-commerce company to list overseas. MakeMyTrip is listed on US Nasdaq. Flipkart is registred in Singapore and now a part of Walmart. JustDial is the only internet-based company listed in India.
SEBI, worried that interesting companies would completely bypass Indian investors, set up a platform for startups - the Institutional Trading Platform (ITP). The ITP was to be a new window on stock exchanges where e-commerce, data analytics, bio-technology and other startups can list and trade on their shares, without going through the rigors of an IPO process. However, this platform did not catch the fancy of the startups and it is yet to see any startup listing. ITP RIP.
Reasons for the current spurt in SME IPOs
In March 2018, SEBI announced that it is planning to allow startups to list on the SME platform as an opportunity to raise capital, apart from usual private equity and angel investment funding route. It is proposed to give special relaxations to startups to list on the SME platform in terms of net worth requirements and profitability. The idea behind the move is to provide capital raising opportunities to small and mid-level startups who cannot list on the main board for the higher compliance norms.
There are many startups who need growth capital. While bigger startups can always tap private equity investors for further capital, smaller ones have limited options to raise capital currently. Providing a platform for them to list would be a positive step, not just for these companies, but also for the investors as they get an opportunity to be part of the growth story. If the relaxations are provided, SME platform would emerge as a viable option for startups to raise capital and even start-up investors would have greater chance to exit early.
Trends observed by SME IPOs
Spurred by investor interest, 145 small and medium enterprises (SMEs) raised a record Rs 2,455 crore through initial public offerings (IPOs) in 2018. Funds raised were used for business expansion plans, working capital requirements and other general corporate purposes. This is in comparison to Rs.1,785 crore being raised through IPOs in 2017. Geographically, the highest amount of fundraising was seen from Maharashtra, whereas Gujarat had the highest number of listings. These companies represent diverse industry base such as media and entertainment, manufacturing, textiles, engineering, finance, chemicals, agriculture, food processing and construction. Some marquee investors also participated in SME IPOs at pre-listing and post-listing stage. This clearly shows SME investing is gaining popularity day-by-day.
Growing SME Capital Markets have addressed several myths and lent a lot of confidence to growing entrepreneurs. With companies listed on SME platform becoming more established, investor base is being broadened. Moreover, with increasing number of SME stocks and greater returns thereon, more and more investors are attracted to SME investing.
With sufficient support from exchange boards and a continuation of investor confidence, 2019 looks to be another good year for SME IPOs. In a country like India, these enterprises are very crucial for overall growth and employment generation. Their expansion will serve to increase the overall health of the Indian economy and the financial market.
Sangeeta Lakhi is Partner, Rajani Associates and Sulakshna Sinha, Head of Department – Domestic Capital Market, Rajani Associates.