Testing the waters with SME listings

By Madhur Kohli, Khaitan & Co
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The small and medium enterprises (SMEs) sector contributes significantly to India’s economy. In value terms, this sector accounts for about 45% of the manufacturing output and 40% of the total exports of the country. In addition, about 59 million people are employed in over 26 million SME units across the country.

The Securities and Exchange Board of India (SEBI) has excogitated the international experience where separate exchanges or trading platforms list securities of SMEs to provide ease of entry and less onerous disclosure requirements. These include the Alternative Investment Market in London, the Growth Enterprises Market in Hong Kong and the Market of the High-growth and Emerging Stocks in Tokyo.

Madhur Kohli Associate Khaitan & Co
Madhur Kohli
Associate
Khaitan & Co

Enabling an SME listing

Recognizing the growing need for finance for SMEs and to enable them to access capital markets with ease and at lower costs, on 13 April 2010 SEBI added chapter XA (to be read as chapter XB following a 23 September notification) to the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 (ICDR Regulations).

Subsequently, through a circular dated 17 May 2010, SEBI provided all stock exchanges with a model SME equity listing agreement. It was hoped that together these moves would encourage promotion of dedicated exchanges for listing and trading of securities issued by SMEs.

The specifics

Accordingly, an issuer whose post-issue paid-up capital is ₹100 million – ₹250 million, can list its securities under chapter XB on the SMEs’ exchange. Additional relaxations for SME issuers under chapter XB of the ICDR Regulations and under the model SME equity listing agreement are as follows:

  • While making a public issue or rights issue the issuer does not have to file a draft offer document with SEBI;
  • The minimum number of allottees is 50. This is in sharp contrast to a normal issue where allotments in a public issue are not allowed for less than 1,000 prospective allottees.
  • Migration to the main board is allowed if the SME meets with the eligibility requirements prescribed by Bombay Stock Exchange Limited (BSE) and National Stock Exchange of India Limited (NSE) and if the issuer obtains the approval of the shareholders for such migration. Similarly, migration to the SME exchange is allowed if a listed issuer’s post-issue paid-up capital is less than ₹250 million, subject to the approval of its shareholders and compliance with the eligibility criteria laid down by the SME exchange.
  • Minimum issue application size is ₹100,000 per application. In contrast, the minimum application for an initial public offer of a normal issuer is between ₹5,000 and ₹7,000 per application;
  • Merchant bankers, who will play a larger role for SME listings, will be the market makers for the companies for a period of three years and will have to underwrite the total issue size. They can bring in external investors for 85% of the issue, but will need to underwrite 15% on their own.
  • Periodic financial results to be submitted on a half yearly basis instead of quarterly basis.
  • SMEs will not be required to publish their financial results (as required for other companies) and can make them available on their website.
  • Companies listed on the SME exchange will need to send their shareholders a statement containing the salient features of all the documents prescribed in section 219(b)(iv) of the Companies Act, 1956, instead of sending a full annual report.

Market concerns

SEBI’s initiative of developing a market for SMEs in India is a welcome step. However, concerns exist. These include (i) an inherent risk for marketing these issues, given the low visibility of SMEs and their brand name; (ii) merchant bankers may find it difficult to create a good demand; (iii) investors may see SME issuers as high risk and so may not invest; (iv) liquidating the investment may be difficult if such stock is infrequently traded; and (v) SMEs may be vulnerable to competition and market conditions.

It is important to remember that the OTC Exchange of India set up in 1990 and INDO Next Platform of the BSE launched in 2005 failed to attract small companies.

BSE and NSE received final approval from SEBI on 28 September and 15 October, respectively, and plan to start SME exchanges soon. It will be interesting to see how SME issuers react and if there is demand for their stock, and also if despite all this, SME issuers prefer to list on the main board, rather than starting off on SME exchange and then migrating – only time will tell.

Madhur Kohli is a senior associate at Khaitan & Co. Khaitan & Co is a full-service law firm with offices in Bangalore, Kolkata, Mumbai and New Delhi.

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