1 November, 2011 SME exchange Launching Pad to Unlock Wealth Presented by: S. Ganapathy Subramanian Vice President, Karvy Computershare P Ltd.

2 Agenda 2 Introduction and backgroundListing – Regulations and procedure Opportunities for you

3 Introduction & background 3

4 4 Introduction to MSME Manufacturing Enterprises – Investment in Plant & Machinery DescriptionINRUSD($) Micro Enterprisesupto Rs. 25 Lakhupto $ 62,500 Small Enterprisesabove Rs. 25 Lakh & upto Rs. 5 Croreabove $ 62,500 & upto $ 1.25 million Medium Enterprisesabove Rs. 5 Crore & upto Rs. 10 Croreabove $ 1.25 million & upto $ 2.5 million  The Micro, Small and Medium Enterprises (MSME) are defined as follows: Service Enterprises – Investment in Equipments DescriptionINRUSD($) Micro Enterprisesupto Rs. 10Lakhsupto $ 25,000 Small Enterprisesabove Rs. 10 Lakhs & upto Rs. 2 Croresabove $ 25,000 & upto $ 0.5 million Medium Enterprisesabove Rs. 2 Crores & upto Rs. 5 Croresabove $ 0.5 million & upto $ 1.5 million

5 5 The rise and significance of MSMEs in India Key statistics: Strength2.6 crore enterprises Contribution8% of GDP Output45% of total manufactured output Trade40% of our exports Employment6 crore people

6 6 Government initiatives  A Micro, Small and Medium Enterprises Act, 2006 was introduced  Its main objectives : Remove impediments due to multiple laws Introduce statutory consultative and recommendatory bodies on MSME policies Improve registration procedures of MSMEs Statutory basis for purchase preference and credit policies Improve realisation of payments of MSMEs

7 7 Challenges faced by SMEs  Difficulty in raising resources – both debt and equity – for expansion and growth  Government / RBI efforts in this regard have proved to be inadequate  Currently, required resources are raised through bank loans, promoter funds and in a few cases from friends and relatives, VC / PE funding  Considerable effort and time lag in raising resources

8 8 Solution offered  Prime Minister’s Task Force (Jan 2010) recommended setting up of a dedicated stock exchange for SMEs  SEBI has laid down the framework for setting up of a new exchange, or separate platform of an existing stock exchange having nationwide terminals, for SMEs  BSE & NSE have received permission of the regulator for setting up the SME platform  Liberalised regulations for going public  Liberalised norms for listing

9 9 Benefits of listing  Access to capital and future financing opportunities  Increased visibility and prestige  Venture capital  Liquidity for shareholders  Creates of employee incentive mechanisms  Facilitates growth through mergers and acquisition  Encourages innovation and entrepreneurial spirit  Efficient risk distribution  Helps in corporate governance  Better valuation  Improvement in debt-equity ratio  Brings transparency  Greater financial inclusion

10 Listing Regulations and procedure 10

11 Why not the conventional listing route? Following norms (BSE) restrict SMEs from direct listing: #ParticularsNorms 1Issued and Paid up capital Minimum paid up capital of Rs. 10 crores OR Minimum networth of Rs. 50 crores (excluding revaluation reserves) in 3 immediately preceding financial years 2Networth 3Profit making track record Distributable profits in terms of sec. 205 of Companies Act, 1956 for atleast 3 out of 5 immediately preceding financial years based on audited financial results with the last financial year reporting profit. Provided that extraordinary income shall not be considered for calculating distributable profit. Provided further that latest 3 Financial Years should comprise a period of atleast 12 months 4Public ShareholdingMeeting with the requirements of SCRA, SCRR and Listing Agreement. 5No. of public shareholdersMinimum 500 6Trading in Compulsory DematMinimum of 50% of the public shareholding should be held in demat form. 7Listing track record with Recognized Stock ExchangeListed on any recognized Stock Exchange 8Information Memorandum Information Memorandum as provided in Schedule II of Companies Act, 1956 to the extent applicable, as certified by the Company Secretary/ MD of the Company 9Withdrawal/ RejectionCompanies can make a fresh application after a period of 3 months

12 Special features - listing on SMEs Special advantages of listing on the SME exchange, over the conventional exchanges:  Lower listing fees  Market makers  Reduced filing requirements – half yearly financial results  Abridged annual reports  No need to publish financial results  No draft document to be filed with SEBI for their observations

13 Regulations Chapter XA of the ICDR deals with issue of specified securities by small and medium enterprises Key highlights:  General qualification for SMEs is upto Rs. 10 crore face value of post issue capital  However, enterprises with post issue capital of upto Rs. 25 crore, may issue shares under the provisions of this chapter  Offer document to be filed with SME exchange, RoC, and SEBI through a Merchant Banker  Due diligence certificate by Merchant Banker in the prescribed form (Form A and Form H of Schedule VI)  Offer document to be hosted on SEBI, Issuer, Merchant Banker(s) and SME exchange  Issue needs to be 100% underwritten, and not upto the minimum subscription level  Merchant Bankers need to underwrite minimum 15%, in their own account  Nominated investor / market maker  Minimum application and trading lot value – Rs. 1 lakh  Minimum allottees must be 50 in number

14 Regulations Key highlights (Contd...) :  Listed companies issuing shares under chapter XA, shall compulsorily list on SME exchange  Shareholder approval for migration to main exchange and vice versa  Market making compulsory for 3 years from the date of listing or date of migration and disclosure thereof  Market makers shall be stock brokers registered on the SME exchange  Inventory shall be at the least 5% of the listed specified securities as on the date of allotment  Minimum contract size  No deals with promoters / group – except those not under lock-in, with the prior permission of SME exchange  Representative of the Merchant Banker can be on the board of the issuer

15 Exemptions Inapplicable regulations  Regulation 6 (1), (2) & (3) – filing of Draft offer document, observations thereon, complying therewith  Regulation 7 – obtention of in-principle approval  Regulation 8 – Documents to be submitted before opening of the issue  Regulation 9 – Making Draft offer public  Regulation 10 – Fast Track Issue  Regulation 25 – Eligibility requirements  Regulation 26 – Conditions for initial public offer  Regulation 27 - Condition for further public offer  Regulation 49 (1) - Minimum application size

16 Market Makers’ Obligations Market makers’ obligations  To be registered as such with SME exchanges, and act for a minimum period  Two-way quote for 75% of the time in a day  Black out period to be informed  Minimum depth Rs. 1 lakh  Not more than 5 market makers for a scrip  Different rates can be quoted by different market makers  Maximum spread / price bands to be stipulated by SME exchange, or in the offer document

17 The issue process  The Issuer who is planning an offer, nominates lead merchant banker(s) as 'book runners’  The Issuer specifies the number of securities to be issued and the price band for the bids  The Issuer also appoints syndicate members with whom orders are to be placed by the investors  The syndicate members input the orders into an 'electronic book'. This process is called 'bidding' and is similar to open auction.  The book normally remains open for a period of 5 days  Bids have to be entered within the specified price band  Bids can be revised by the bidders before the book closes  On the close of the book building period, the book runners evaluate the bids on the basis of the demand at various price levels  The book runners and the Issuer decide the final price at which the securities shall be issued  Generally, the number of shares is fixed, the issue size gets frozen based on the final price per share  Allocation of securities is made to the successful bidders. The rest get refund orders.

18 Opportunities for you 18

19 What it means to you? Opportunity for you  You will be the first point of contact  You can set up merchant banking outfits, subject to acquiring skills to market the issue  Play the role of the legal counsel also

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