1. Fund Raising on SME Exchanges
Opportunities & Challenges
Amar R Kakaria
FCA, ACS, AICWA

2. SME Company Says: List Me !
God Says: Trust Me…
Time Says: Plan Me…
Future Says: Win Me…
Money Says: Earn Me…
SME Company Says: List Me !
Why?
When?
Where?
How?

3. Which is your favorite number?20 5 1

4. Presentation Outline MSME Classification
Need for SME Exchange & Overview
SEBI Guidelines
Process of Listing
Success Stories
Opportunities & Challenges
Grey Areas

5. Classification of MSMEs
Manufacturing Sector : (Investment in Plant & Machinery)
Micro Enterprises: Does not exceed Rs. 25 Lakhs
Small Enterprises: Rs. 25 Lakhs to Rs. 5 Crores
Medium Enterprises: Rs. 5 Crores to Rs. 10 Crores
Service Sector: (Investment in equipment)
Micro Enterprises: Does not exceed Rs. 10 Lakhs
Small Enterprises: Rs. 10 Lakhs to Rs. 2 Crores
Medium Enterprises: Rs. 2 Crores to Rs. 5 Crores

6. Contributes 45% of the Industrial Output Contributes 40% of Exports
SME Sector Overview
A pivotal role in the development process of most economies
Constitute a major part of the industrial activity
Contribution of SMEs
SME Sector
Contributes 45% of the Industrial Output
Contributes 40% of Exports
Provides employment to over 65 Million and creates 1 Million Jobs every year
Produces more than 8000 quality products for the Indian and international markets.

7. Export Commodities from SMEs
Backbone of the Economy
Export Commodities from SMEs
Sports Goods, Readymade Garments, Woolen Garments and Knitwear, Plastic Products, Processed Food and Leather Products
Presence in Diverse Sectors:
Manufacturing, Engineering, Pharmaceuticals, Textile & Garments, Retail, IT, Agro & Service Sectors

8. Funding Life Cycle SME Life Cycle Expansion Stage Decline due to
lack of funds
IPO
Developing Stage
Stable Profit Margins
Growth Stage
PE Firms hold the
hands of SMEs
Unlocking the Capital Market Opportunities
Nascent Stage
Supported by Venture
Capital Firms
High Risk & Lower Profit Margins
Increase in Sales & Rise in Profit
Profit Margin tends to rise as the business expands
Profitability

9. SME vs. Main Board Basis SME Main Board Post – issue paid-up capital
Min INR 3 crore & 1 crore on BSE SME & NSE Emerge respectively. Maximum INR 25 crore
Minimum INR 10 crore
Minimum No. of Allotees 50
1000
Track record
Relaxed track record norms
Stringent track record norms like Operating Profit of 15 Cr
Offer Document vetting
By Exchange
By SEBI
IPO Application Size by Investors
Min. INR 1 lakh
No restriction
IPO Time frame
2 – 3 Months
9 months – 1 year
Reporting Requirements
Half yearly
Quarterly

10. Need for SME Exchanges
The sector is traditionally dependant upon debt financing. Despite several directives by Government of India to boost SME lending, banks/FIs have selective and have remained extremely cautious in lending to them.
Moreover, there has been less participation in equity of smaller and early stage business by Angel Investors, VCs and PE players.
The existing structure of capital markets in India makes it difficult for SMEs to raise capital due to higher cost (including high cost of compliance).
The SMEs need to be provided a framework that would enable them to raise capital quickly and at a low cost.
An efficient and transparent SME Exchange / platform, providing cost effective solution to SMEs by reducing the IPO cost and without undervaluing the companies, can help SMEs to easily access huge market.

11. SME Exchanges – An Overview
Recommended by Prime Minister’s Task Force
Defined under Chapter XA / XB of SEBI (ICDR) Regulations
SEBI has issued a final circular on May 18, 2010 for setting up a stock exchange/ a trading platform by a recognized Stock Exchange having nationwide trading terminals for SME.
Necessary amendments have been made in the various regulations.
Model equity listing agreement has been prepared and notified.
BSE launched a SME-Exchange for small and medium enterprises
NSE has also launched EMERGE

12. SEBI Guidelines
Companies listed on the SME platform exempted from IPO / FPO eligibility norms prescribed in ICDR Guidelines
Offer document to be filed with SEBI & SEs, no observations to be issued by SEBI on the offer document filed by Merchant Bankers
Minimum IPO application size & trading lot of Rs 1 lakh
Minimum 50 investors required for the IPO
Listing is linked with the face value of paid up capital post IPO
Up to Rs.10 crores – SME Platform;
Between 10 – 25 crores – Optional to issuer on SME or Main platform
Beyond 25 crores – Compulsory on the Main platform
Suitable provisions are made for migration to / from main board
Minimum 2 years of satisfactory track record to be maintained
Preparation and declaration of Financial results on a half yearly basis for SMEs, instead of quarterly basis

13. SEBI Guidelines
Merchant Banker to ensure that the issue is 100% underwritten; lead Merchant Banker will have to underwrite minimum 15%
Merchant Bankers to be responsible for market making for a minimum period of 3 years
During the compulsory market making period, the promoter holding can not be offered to market makers.
Market maker shall be required to provide two way quote for 75% of time in a day, to be monitored by the Stock exchange and the minimum depth of the quote shall be Rs.1 lakh.
Execution of the order at the quoted price and quantity must be guaranteed by the market makers.
Not more than 5 market makers for a scrip to be appointed. Market makers may compete amongst themselves.

14. Additional Requirements by BSE
Minimum Net Tangible Assets of Rs. 3 Crore
Minimum Net Worth (excluding revaluation reserves) of Rs. 3 Crore
Track record of distributable profits for at least 2 years out of immediately preceding 3 financial years. Otherwise, Net Worth should be 5 crores
Minimum post issue capital of Rs 3 crores
Compulsory trading in demat securities
Website of the applicant company is mandatory
Listing process involves interview of promoters of the applicant company with the Listing Advisory Committee as well as actual site visit.
Company has to file a compliance certificate from a Practising Company Secretary as and when it is made applicable.

15. Process Snapshot Entire process should take around 2-3 months…
Board Meeting
Special Resolution of Members U/S 62
Appoint Merchant Banker & Various intermediaries
File Offer Document with the SME Exchange/ ROC/SEBI
Due Diligence & ROC Formalities
In-Principle Approval from SME Exchanges
Determine Offer Price
Allotment of Shares
Listing of Shares & Market Making
Migration to Main Board
Entire process should take
around 2-3 months…

16. First Step To Long Term Wealth Creation
Long Term Value Creation
Become A
leading Company
SME Listing gives access to
SME Listing gives access to the path of long term wealth creation for all stakeholders
the path of long term
wealth creation for all
SME Listing
Scaling up Business
Migration to Main Board
Further Capital Raising
Further business Expansion
stakeholders
First Step To Long Term Wealth Creation
First Step To Long Term
Wealth Creation

17. SRG Housing Finance Listed on BSE SME 11/09/2012
Migrated to main Board
04/02/2015
SME Listing
After Migration

18. Migrated to main Board 03/06/2015
Jupiter Infomedia
Listed on BSE SME 16/08/2012
Migrated to main Board 03/06/2015
Post Migration
SME Listing

19. Migrated to main Board 03/06/2015
Ashapura Intimate Fashion
Listed on BSE SME 15/04/2013
Migrated to main Board 03/06/2015
Post Migration
Pre Listing
SME Listing

20. Migrated to main Board 09/11/2015
Kushal Tradelink
Listed on BSE SME 04/09/2013
Migrated to main Board 09/11/2015
Pre Listing

21. Migrated to main Board 14/01/2016
VKJ Infra
Listed on BSE SME 30/08/2013
Migrated to main Board 14/01/2016
Pre Listing

22. Migrated to main Board 17/02/2016
Captain Polyplast
Listed on BSE SME 11/12/2013
Migrated to main Board 17/02/2016
SME Listing
Pre Listing
Post Migration

23. Migrated to main Board 10/02/2015
Veto Switchgears
Listed on NSE EMERGE 13/12/2012
Migrated to main Board 10/02/2015
Post Migration
Pre Listing
SME Listing

24. Opportunities for SMEs
Offers direct access to capital and future financing opportunities
Improves brand equity among the stakeholders
Helps in attracting Venture Capital / Private Equity Funds
Provides better liquidity to the business partners / shareholders
Offers Flexibility to launch stock options / incentives to reward loyal employees and boost their morale
Facilitates inorganic growth through Mergers & Acquisitions
Encourages innovation & entrepreneurial spirit
Serves as an efficient risk distribution mechanism

25. Opportunities for SMEs
Offers direct access to capital and future financing opportunities
Improves brand equity among the stakeholders
Helps in attracting Venture Capital / Private Equity Funds
Provides better liquidity to the business partners / shareholders
Offers Flexibility to launch stock options / incentives to reward loyal employees and boost their morale
Facilitates inorganic growth through Mergers & Acquisitions
Encourages innovation & entrepreneurial spirit
Serves as an efficient risk distribution mechanism
Provides various tax benefits to the SMEs as Compare to unlisted Company
Anytime migrate to the Main Board of BSE

26. Opportunities for Professionals
Huge untapped potential of the sector: Around 26 mn enterprises (Micro, small and Medium) are present in India, out of which 1.55 mn are registered and balance are unregistered.
Good revenue potential : Since there is no benchmark, there is good scope of earnings through fees and commission.
An alternative product : The product can be marketed as alternative to some of the existing products such as PE, reverse merger.
Concept : Concept can be marketed as angel investment model without any liquidity concerns to HNIs.
Growth Opportunity : Multiple avenues for growth in the form of educating companies, due diligence, DRHP preparation, co-ordination with different agencies like merchant banker, underwriters, investors, etc.

27. Major Challenges
Engagement of merchant bankers with the company for continuous market making for a period of three years.
Requirement of Compulsory 100% Underwriting.
Lack of interest from reputed and larger merchant bankers in this space.
Generating interest of prospective investors in this space, who are keen to nurture the company before unlocking the valuations at appropriate stage.
Efforts in the past for catering to the needs of small companies had failed miserably: OTCEI was set up in 1989 and the INDO NEXT Platform of the BSE was launched in 2005.
From regulatory perspective, it is likely to be more difficult to control the activities of SMEs as they may not have adequate infrastructure to meet with the requirements of audit, disclosure, reporting and compliance procedures as compared to larger and more established companies.

28. Many Grey Areas Do SME's need to raise funds from public?
Will SME exchange reduce the cost of fund raising for SMEs?
Is it the right time for Merchant bankers to market this product aggressively?
Whether low cost IPOs on SME Exchanges will have a dent on revenues generated by Merchant Bankers on normal IPOs?
What will be the effect on branding as Merchant Banker?
Whether few more exemptions are required to make SME exchanges work?
What will be the protection to Merchant Banker if the Promoters / Company default in running the business?

29. Thank You! Rakh hausla wo manjar bhi ayega,
Pyaseke pas khud samandar bhi ayega,
Thak kar na baith ae manzil ke musafir,
Manzil bhi milegi aur milne ka maza bhi ayega…
Thank You!