Can a Small Business get listed on the Stock Exchange?
India has one of the most promising business environments for small businesses and start-ups. MSMEs and small business hold more than 80% of market share among themselves, and are the foundation of the economy. They generate employment and foster innovation.
But MSMEs lack access to adequate and timely funds at low interest rates, which are essential for their growth. The Expert Committee Report of the RBI in 2019 says that the overall credit gap in the MSME sector is in the range of Rs 20-Rs 25 trillion. To bridge this gap, small businesses raise funds by publicly listing their equity on stock exchanges devoted to SMEs.
Government support for small businesses
SEBI had launched Small and Medium Enterprise ( SME ) platform in 2011 to allow small and medium enterprises to raise capital, and came out with relaxed guidelines for the listing of their shares. This platform offers a new asset class to investors. In February 2012, the first SME IPO was placed on the BSE SME platform. SEBI allows a company to place an IPO on SME exchanges, if its post-issue paid-up capital is less than or equal to Rs 10 crore.
Union Minister Nitin Gadkari had announced in June 2020, that the MSME units that have a good turnover and GST, and which export, will get listed on Indian stock exchanges. The Government will also buy shares in them up to a maximum of 15% of their equity. This will strengthen the MSME stock. In recent years, SME exchanges has seen more investor activities, than the main exchanges.
SME exchanges have been created in various developed and developing economies, and they deal in the trading of shares/securities of SMEs, who otherwise find it difficult to get listed on the Main Boards. The SME platforms of the Indian stock exchanges are intended for small and medium sized companies with high growth prospects. It shall be open for SMEs whose post issue paid up capital shall be less than or equal to Rs 25 crores.
The two major stock exchanges in the country are the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE). In this article we will go through the process of how a small business can get its share listed on the SME platforms of these exchanges. The name of the SME platform of NSE is ‘Emerge’, and that of the BSE is simply BSE SME Exchange. The basic criteria for both these exchanges are the same, and are given by the Securities and Exchange Board of India (SEBI).
BSE and NSE had reduced the annual listing fees for MSMEs on May, 2020. As of now, to get listed on the main board of BSE, the minimum paid-up capital is Rs 3 crores, and that of NSE is Rs 10 crores. The SME platform shall allow small businesses and new ventures to raise fresh capital, as they grow and transit to the Exchange’s main board.
How Listing Helps Small Businesses?
As a small business owner, you must have wondered why do companies like yours, want to come to the Capital Markets? The main reasons are:
- To raise fresh capital through equity infusion.
- Equity financing provides growth opportunities like Merger and Acquisitions, and expansion.
- Increase net worth and valuation.
- It also increases your leveraging capacity. The debt to equity ratio gets more attractive, and the capacity to raise debt increases.
- It increases your credibility and visibility because you are listed on the stock exchange. It enhances your financial status, causing a surge in the demand for the company’s shares.
- A structured market gives them wider reach to investors.
- Widens capital base and increases working capital.
- MSMEs can raise funds at low cost and comparatively relaxed norms and compliance. They no longer have to depend on banks for their funding.
A promoter of a small business usually has limited capital, and if it gets exhausted, but he wants to expand the company, he has to come to the Capital Market.
Eligibility criteria for an SME for listing
But if a company does not fulfil these criteria but still wants to get listed, then its net worth should be Rs 5 crores.
Important Points For Entering SME Exchange
- A company which wants to be listed on the SME, should not have been referred to the Board for Industrial and Financial Reconstruction ( BIFR ). However, if it has come out of the ambit of BIFR, it is eligible.
- No petition for winding up of the applicant company must be pending in a Court.
- There should not be any regulatory cases or disciplinary action pending against the applicant company or its directors by a stock exchange or a regulatory authority in the past three years.
- It must not have raised capital from the public previously, nor made a public offer.
The above points show that the owner of a small business must be very careful about its eligibility, if he wants to get his company listed.
Compliance for SME Listing
There are some compliance requirements for a small business to get listed:
- The SME must be a Private Limited Company.
- The Company should have a full time Company Secretary ( Compliance Officer ).
- Have at least 50% independent directors in its Board, to comply with corporate governance norms.
- Should have a website.
- Minimum application and lot size of shares should not be less than Rs 100,000. The lot size is decided on the price band. This is to ensure that only HNIs and large investors invest in SMEs.
- 100% of the issue should be underwritten, out of which at least 15% should be underwritten by the Merchant Banker or the Lead Manager himself.
How can you migrate from SME Exchange to the Main Board?
BSE and NSE have made it possible for SMEs to migrate to the Main Board, without making an Initial Public Offer. To do so, the owner of a small business has to fulfil the following criteria:
- If the market capitalisation of a company listed on the SME exceeds Rs 25 crores, it has to move compulsorily to the Main Board.
- In the case of BSE, this market capitalisation is calculated on the average price the stock is traded in the 20 preceding traded days from the date of submission of application to the Board for migration.
- Also, the applicant firm needs to ensure that their post-issue capital exceeds Rs 10 crore, and that their promoters or directors should not be barred from the capital markets.
- The company should be listed and traded on the BSE SME platform for a minimum period of two years.
- Shareholder approval to be sought by a special resolution.
How Listing of Small Businesses Helps Investors?
- It provides opportunities to investors to identify and invest in good companies at an early stage, with an easy Exit Route.
- The investors also gain long term Capital Gains tax benefits.
- It mitigates their risks.
Many owners of small companies dream of getting listed on the stock exchanges, but some fall short of the eligibility criteria of BSE and NSE. But, if they abide by the above rules and regulations, there is no reason why they cannot profit from the bullish run in the stock markets. Listing on the exchanges will create a win-win situation for both the small business owners and the investors.
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