Introduction

There are at least a million sizeable SMEs in the country, and so far there have been only debt financing options without any access to equity capital. Many SMEs find it difficult to get listed on the Bombay Stock Exchange (BSE), so the SME Exchange has been conceived. It will help the SMEs in raising equity capital for their growth. Raising equity will help them balance their debt-equity ratio, and balance sheets will be much healthier. This will help the companies to unleash their valuation. Listed companies will have easy access to alternate funding options like price-to-earning ratios, ADRs, GDRs, foreign industrial investments and so on. The repose of faith by investors in listed SMEs is high. Most importantly, all investors look for an exit at an appropriate point, and an exchange is the right platform.

How different from Main Board ?

The new thing about SME Exchange is that the issue will be 100% underwritten and this means that the issue will be 100% success. Other new aspect is that there will be support of three years in the secondary market through market making activity. The SMEs with paid up capital up to Rs. 10 crores can come on the SME Exchange, in contrast to the paid up capital of Rs. 10 crores or more for the main board. The Listing norms have been simplified. The issuer has to take the approval of the Exchange and SEBI approval is not required. A copy of the offer document will be sent to the SEBI for their information. The condition in respect of filing of Draft Red Herring Prospectus (DRHP), obtaining in-principle approval of SEBI, and issuing public notice are waived for listing of the SMEs. This saves about 6 moths time period. The merchant banker can file the RHP with due diligence certificate with Exchange and approval of Exchange is sufficient.
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How different from Main Board ?

The Compliance norms are simplified. Half yearly compliance is required instead of quarterly compliance. The abridged version of the annual reports need to be sent to the investors instead of the entire annual report and posting the soft copy of the report on the website is sufficient. The issue expenses will be minimal on the marketing, advertisement and stationery. However, the issue will be charged for underwriting, subunderwriting and responsibility of three years market making. Market making is compulsory for 3 years, unlike on main platform. Listing fees on BSE SME platform are minimal compared to the main board. The SMEs with the paid up capital between Rs. 10 crores and Rs. 25 crores has the option to get listed either on main board or on the SME Exchange. Provision for migration from BSE SME Exchange to Main Board and vice versa. Three years profit making is not necessary for SMEs for listing and waived off.
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Simplification of the Listing Norms for SMEs on the BSE SME Exchange
The Listing norms are simplified. The issuer has to take the approval of the Exchange and SEBI s approval is not required. A copy will be sent to the SEBI for its information. The condition of track record of distributable profits in terms of Section 205 of the Companies Act, 1956, for at least 3 out of preceding 5 years is waived off for SMEs. Four steps - the filing of DRHP, in-principle approval of the exchange, in-principle of the SEBI and public notice for one month are waived off for the SMEs listing on the SME Exchange. This will save about 6 months for the listing of SMEs. The merchant banker to the issue can file RHP (Red Herring Prospectus) with the due diligence certificate and the exchange approval is sufficient. The process of launching an IPO for listing on SME Exchange may be completed within two to three months, compared to the time frame of 8 to 9 months required for launching an IPO proposed to be listed on the Main Board.

Migration from SME Platform to Main Board

Any SME on BSE SME Platform having a paid up capital more than Rs. 10 crores can move to the main board provided that the special resolution is passed in the AGM in favor with at least two third of the number of votes cast by the non-promoter shareholders and then apply to BSE SME. The SME migrating to the main board has to comply with all the main board norms like minimum 1000 investors, pay main board listing fees and do the quarterly compliance etc.
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Responsibility of the Merchant Bankers on SME Exchange

The Merchant Bankers in the Main Board assist the company in raising equity capital through primary record, but in the SME Exchange the Merchant Bankers have to hand hold the company for 3 years and ensure that there is continuity in market making in the SME s scrip for 3 years.

The other additional responsibility is that the issue should be 100% underwritten and the merchant banker has to do compulsory underwriting of 15% in his own books of accounts. There is need for syndication for the purpose of underwriting and the responsibility lies with the merchant banker. There is no such responsibility cast upon the merchant bankers while listing scrips on the Main Board.

Need for SME Exchange

Provide the SMEs with equity financing opportunities to grow their business from expansion to acquisition Equity Financing will lower the Debt burden leading to lower financing cost and healthier balance sheet Expand the investors base, which in turn will help in getting secondary equity financing, including private placement Enhance company s visibility. Media coverage can provide SME with greater profile and credibility leading to increase in the value of its shares Incentives for greater angle investor, venture capital and P/E funds participation by providing an exit option thus reducing their lock-in period

Need for SME Exchange

Greater incentive for the employees as they can participate in the ownership of the company and benefit from being its shareholders Encourage innovation and entrepreneurial spirit Capital Market will help distribute risk more efficiently by transfer of risk to those, who are best able to bear it SME sector will grow better on two pillars of Financial system i.e. Banking and Capital Market Initiating a dedicated Stock Exchange for SMEs will lead to mobilisation of the diversified resources of finance and build a bridge between the SMEs, Private Equity and the Venture Capital by providing an exit route.
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SME Exchange SEBI Guidelines

Issuer with post issue face value capital up to Rs.10 crores shall be covered under the SME Platform, Issuer with post issue face value capital between Rs.10 25 crores may get listed at SME Platform and Issue with post issue face value capital above Rs.25 crores has to necessarily listed at main board of the Exchanges Suitable provisions for migration to/ from main board The minimum application amount and trading lot not be less than Rs.1,00,000/At least, 50 investors at the time of the IPO and each investor should invest at least Rs 1 lakh. The post issue paid-up capital can be as less as Rs 50 lakh. All existing Trading Members would be eligible to participate in SME exchange without any further registration 100% underwritting by MB and MB underwrite 15% in their own account The Merchant Banker to the issue will undertake market making through a stock broker who is registered as market maker with SME Exchange. The Merchant Banker shall be responsible for market making for a minimum period of 3 years

Preparations for the IPO Contents of Offer document

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Preparations for the IPO Relevance of Due Diligence

Due Diligence on the various approvals required from regulatory bodies Due diligence on the applicability of various regulations Risk factors associated with the company External environment effecting the company Magnitude and listing out of litigations Business activity Past performance and financial results Material contracts and agreements Detailed report on promoters & management
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Preparations for the IPO Role of Merchant Banker

Selection of investment banker Selection of registrar and transfer agent (RTA) Selection of syndicate member /sub- syndicate members Selection of electronic media and advertising agency Selection of Escrow Bankers Understanding of regulations pertaining to Stock Exchange, SEBI and the other regulatory bodies
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Preparations for the IPO Marketing Strategy

Positioning of company through sustained media efforts including visual media Regular interaction with brokers, FII & FIs and HNIs Creating awareness about the issue to the investors Selection of potential bidding centers Effective equity story supplemented by proper research Presentation to the investors and the analysts Creating sustainable valuation and shareholder base Effective communication for better results
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How does the SME exchange help SMEs?

A dedicated exchange for these SMEs will help them in finding a solution to their financial requirements and crunching expansion plans. Listing of a company gives better valuation to the company. The debt and equity ratios will improve and balance sheet will look much healthier. The listed SMEs will unlock their wealth in the medium to long term and will do the wealth creation for the promoters and the investors. The listed SMEs will get better visibility among the investors. The investor base of the company improves for the listed companies in medium term.

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How does the SME exchange help SMEs?

The repose of faith by the investors domestic and foreigners in the listed SMEs is high. Transparency and corporate governance will improve manifold by listing on SME Platform. Listed company will have easy accessibility to alternate funding options. The banks, P/E funds and other financial institutions provide them the loans very easily. The fund raising through ADRs and GDRs become easier. Also, the company can raise more funds through follow on public offering. The tax benefits are also immense. The long term capital gain tax on listed company is zero.
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