How To list a MSME in Indian Stock Exchange

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How To list a MSME in Indian Stock Exchange

With the advent of planned economy in 1951, special role was earmarked for SMEs, which was given a fillip by the subsequent progressive industrial policies. The Micro, Small, and Medium Enterprises Development (MSMED) Act, 2006 provided for facilitating the promotion and development and enhancing the competitiveness of MSMEs (commonly referred to as SMEs) and for the related matters. A big leap for SMEs was witnessed in 2010, with “The Prime Minister’s Task Force” recommending setting up of dedicated stock exchange/ platform for SMEs. SEBI, through its circular dated May 18, 2010, laid down framework for setting up a stock exchange/ trading platform dedicated to SMEs.
SME Exchange
An SME Exchange is a stock exchange dedicated for trading the shares / securities of SMEs who otherwise find it difficult to get listed on the Main Board. The concept originated from the difficulties faced by SMEs in gaining visibility and attracting sufficient trading volumes when listed along with
other stocks on the Main Board of stock exchanges. World over, dedicated SME trading platforms or exchanges are prevalent, which are known by different names such as ‘Alternate Investment markets’ or ‘growth enterprises market’, ‘SME Board’ etc. Some of the known
markets for SMEs are AIM (Alternate Investment Market) in UK, TSX Ventures in Canada, GEM (Growth Enterprise Market) in Hong Kong, MOTHERS (Market of the high-growth and emerging stocks) in Japan, Catalist in Singapore and the latest initiative in China – Chinext. As a matter of fact, NASDAQ also started as an SME exchange.
In India, “SME Exchange” is defined in Chapter XB of the Securities and Exchange Board of India (Issue Of Capital And Disclosure Requirements) Regulations as a trading platform of a recognized stock exchange or a dedicated exchange permitted by SEBI to list the securities issued in accordance with Chapter XA of SEBI (ICDR) Regulations and this excludes the Main Board (which is in turn is defined as a recognized stock exchange having nationwide trading terminals, other than SME exchange).
To be listed on the SME Exchange, the post-issue paid up capital of the company should not exceed INR 25 Crore. This means that the SME Exchange is not limited to the Small and Medium Scale enterprises which are defined under “The Micro, Small and Medium Enterprises Development Act, 2006” as enterprises where the investment in plant and machinery does not exceed INR 10 Crore. As of now, to get listed on the Main Board of National Stock Exchange (NSE), the minimum paid up capital required is INR 10 Crore and that of Bombay Stock Exchange (BSE) is INR 3 Crore. Hence, those companies with paid up capital between INR 10 Crore to INR 25 Crore has the option of migrating from SME Exchange to the Main Board or vice versa. The companies listed on the SME exchange are allowed to migrate to the Main Board as and when they meet the listing requirements of the Main Board and there shall be compulsory migration of SMEs from the SME exchange, in case their post issue paid up capital exceeds INR 25 Crore. click here to register your business 
BSE, as an Exchange, is the first-one to seize the initiative followed by NSE, both of them have come up with their SME Exchanges to leverage their respective trading platforms developed over the period.
1) Desired issue size :
 < 50 Lacks >= 50 Lacks
2) Post issue face value capital :
 < 1 Crore Between Rs 1 Crore to Rs 25 Crore > Rs 25 Crore
3) Net Tangible assets :
 < 1 Crore >= 1 Crore
4) Track record of distributable profits for at least 2 years out of preceding 3 completed financial years :
 Yes No
5) Existing Networth (excluding revaluation reserves) :
 < 1 Crore Between Rs 1 Crore to Rs 3 Crore > = Rs 3 Cr
6) Track record of at least 3 years for the Company :
 Yes No
7) Positive cash accruals (EBDT) from operations for at least 2 preceding financial years :
 Yes No
8) Positive net worth for at least 2 preceding financial years : click here to register your business 
 Yes No
Need for SME Exchange
Despite the benefits associated with public listing, the SMEs were not able to access the capital markets through extant Stock Exchanges due to several factors such as stringent regulatory, disclosure and financial requirements and the like. The creation of a separate stock exchange for SMEs has been on the policy makers’ agenda for quite some time, and finally in March, 2012, SME Exchange was launched. A dedicated stock exchange for SMEs would allow them accessing capital markets easily, quickly and at lesser costs.
The need of a dedicated SME Exchange can be attributed to several factors including the following  click here to register your business
A dedicated SME exchange will provide SMEs with equity financing opportunities to grow their business – from expansion to acquisitions Listing the company would facilitate expansion of the investors base, which in turn help company get secondary market for equity financing, including private placement. With the availability of equity financing options, the debt burden can be set lower resulting in a healthier balance sheet and lowered financing cost Company’s visibility will improve with the coverage from analysts and media that can add to the credence and image of the SME leading to benchmarking its fair value The listing would result in an increased participation by venture capital players as they would have a ready, transparent and tax-efficient exit route.Listing would add value to the companies who wish to make use of ESOPs and other stock base compensation plans as a tool to reward and retain their employees. It is expected to encourage innovation and entrepreneurial spirit, much required from the perspective of Indian national economy.Capital Market allows distribution of risk efficiently by transferring risk to those who are best able to bear it. SME sector will grow better on two pillars of Financial system, i.e., Banking for debt capital and Capital Market for equity capital.
Benefits of SME Listing
SEBI Norms for Listing
In order to lay down the policy for issue, listing and trading of securities to be issued by SMEs, necessary amendments have been made in the SEBI ICDR Regulations and consequent amendments have been made into various other regulations viz. :
SEBI (Merchant Bankers) Regulations 1992 SEBI (Foreign Institutional Investors) Regulations, 1995 SEBI (Venture Capital Funds) Regulations, 1996 SEBI (Substantial Acquisition of Shares and Takeovers) Regulations and SEBI (Stock Brokers and Sub-Brokers) Regulations, 1992
SEBI has, from time to time, issued the circulars and guidelines for setting up of the exchange for SMEs. SEBI vide “ICDR Third Amendment Regulations” 2010 dated 13th April, 2010, inserted a new Chapter XB under the head “Issue of Specified Securities by Small and Medium Enterprises”. A further circular was also issued on 18th May, 2010 after taking into account the suggestions from market participants for the SME platform. The necessary provisions for listing of specified securities under the SME Platform vide the above regulations and circulars are enumerated in brief:
The post issue face value capital should not exceed INR Twenty Five Crores (INR 25 Crore).The minimum application and trading lot size shall not be less than INR 1,00,000/- The existing members of stock exchanges (stock brokers) would be eligible to participate in SME Platform.The issues shall be 100% underwritten and merchant bankers shall underwrite 15% in their own account.
Besides, SEBI has compulsorily mandated market making for all scrips listed and traded on SME Platform. The obligations of market making are as follows:
The merchant bankers to the issue will undertake market making through a stock broker who is registered as market maker with the SME Platform.The merchant bankers shall be responsible for market making for a minimum period of 3 years.The market makers are required to provide two way quotes for 75% of the time in a day. The same shall be monitored by the exchange. There will not be more than 5 market makers for a scrip. Market makers will compete with other market makers for better price discovery. The exchange shall prescribe the minimum spread between the bid and ask price. During the compulsory market making period, the promoter holding shall not be eligible for the offering to market makers. Market Maker shall be allowed to de-register by giving one month notice to the exchange. Trading system may be either order driven or quote driven.
The application and trading lot size is being kept at INR 1,00,000/- so as to curtail the exposure of retail investors. It has also been stated that the minimum depth shall be of one lakh rupees and at any point of time it cannot go below that amount. The investors holding with value less than INR 1,00,000/- shall be allowed to offer their holding to the market maker in one lot. However, in functionality the market lot will be subject to revival after a stipulated time.
Further, the provisions of SEBI ICDR Regulations apply to SME IPO as well, unless any particular provision is specifically exempted.
Key Benefits
 Funding Convenience
• Access to capital and financing opportunities :
Going public provides SMEs with equity financing opportunities to grow their business from operations to expansion to inorganic acquisitions. Access to equity financing lowers the debt burden leading to lower financing costs and healthier balance sheets. The continuing requirement for adhering to stock market rules for the issuers lowers the ongoing information and monitoring costs for the banks.
• M&A currency :
Listed shares act as a currency, esp. for inorganic business acquisition transactions. Listed shares can be utilized as an acquisition currency, as an alternative to cash consideration, to acquire existing businesses / assets. Using shares as a currency can be a tax efficient and cost effective vehicle to finance an acquisition transaction.
• Premium Valuation :
Valuation of a company is determined by various factors, one of which is class of company – listed or closely-held. The value discounting by investors of an unlisted entity can be avoided, if the shares are listed on a nation-wide exchange platform including SME Exchange.
• Efficient Risk Distribution for Investors :
It is expected that the development of capital markets helps distribute risk efficiently by transfer of risk to those best able to bear it. Capital is a precious resource. When one can afford, he can invest it; when one needs it back, he can exit. This in-built mechanism of risk-transfer, in turn, lends to sustainability to market forces. Thus capital markets for SMEs are also expected to ensure that capital flows to its best uses and even the riskier activities with higher payoffs could be funded.
• Entry & Exit Platforms for PE / Other Investors :
The presence of a market-driven transparent trading platform provides with a ready and easy entry and exit for strategic investors. Listing not only offers the investors flexibility for entry and exit, but also the confidence required for any such transaction.
 Tax Benefits
Income- tax Act offers immense benefits to companies if their shares are listed on recognized stock exchanges including SME Exchange. Tax benefits, often, turns out to be one of prominent factors for listing :
• No Long-term Capital Gains Tax
Transfer of unlisted shares attracts long term capital gains tax of 20% and short term capital gains of up to 30% (depending upon an assessee’s income slab and applicable tax rate). Whereas in case of listed shares, tax on long term capital gains is nil and short term capital gains is 15%, provided the transaction has been subjected to securities transaction tax (STT). This preferential tax treatment on transfer of listed shares is also available to shares listed on SME Exchange. Listing on SME Exchange is a valid tax-planning tool and could, thus, lead to enormous tax saving for SME entrepreneurs / investors.
 • No tax on fresh equity infusion in the company
Recently the Finance Act, 2012 imposed a tax liability on fresh issuance of equity shares by an unlisted company to investors other than “Registered Venture Fund”, if the issuance is made at a value more than the fair value. This could make SMEs subject to heavy tax outgo, since they often go for fund raising through equity issuance to investors. Such a tax liability, however, does not attract if the shares of the company are listed on recognize stock exchanges, including SME Exchange.
• No tax on distressed business purchase
Income-tax Act levies a tax inter alia on the buyer of shares of an unlisted company, if the transaction is conducted at a value less than its book value. Hence acquisition of distressed assets could attract heavy tax. Such a tax liability, however, does not attract if the shares of the company are listed on recognize stock exchanges, including SME Exchange.
• Efficient Risk Distribution for Investors :
It is expected that the development of capital markets helps distribute risk efficiently by transfer of risk to those best able to bear it. Capital is a precious resource. When one can afford, he can invest it; when one needs it back, he can exit. This in-built mechanism of risk-transfer, in turn, lends to sustainability to market forces. Thus capital markets for SMEs are also expected to ensure that capital flows to its best uses and even the riskier activities with higher payoffs could be funded.
• Entry & Exit Platforms for PE / Other Investors :
The presence of a market-driven transparent trading platform provides with a ready and easy entry and exit for strategic investors. Listing not only offers the investors flexibility for entry and exit, but also the confidence required for any such transaction.
 Other Benefits
• Visibility – Profile Building
Going for a public issue is most likely to enhance the company’s visibility. Greater public awareness gained through media coverage, and research coverage by sector investment analysts provide the SMEs with greater visibility and help brand building which otherwise may remain a dream especially for SMEs.
• Unlocking / Benchmarking Value
The fair value of an unlisted company may not be benchmarked appropriately, in absence of a market-driven mechanism. The companies listed on a stock exchange are traded and the market forces are expected to establish their fair value or near-fair value. This leads to unlocking or benchmarking of fair value of the SME businesses.
• Incentive Mechanism for Employees
The employees of an SME can participate in the ownership and benefit from being a shareholder. This can serve to ensure stronger employee commitment to the company’s performance and success. ESOPs and any other share-based compensation plan of listed company have an immediate and tangible value to employees. This, in turn, serves as a talent retention tool.
• Benefit for Companies in Supply Chain
The companies in supply chain in the forward or backward integration may take strategic stake as part of growth & expansion. Also, companies in the same business line planning to expand the operations may take a stake in listed SMEs.
• Governance – Internal Systems
Though the requirements for a company listed on SME Exchange are not as stringent as that for Main Board listed companies, nevertheless SME listing ensures that the company has drawn up the internal control systems and set up minimum required framework of corporate governance. This, in turn, lends sustainability to the business.

Eligibility Criteria
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Besides, SEBI norms, the stock exchanges have also prescribed eligibility criteria for listing on their respective SME Exchange:
Eligibility Criteria for BSE SME
BSE SME Exchange stipulates the following eligibility criteria for an applicant desired of getting listed on BSE SME Exchange :
Net Tangible assets of at least INR 1 crore as per the latest audited financial results. Net-worth (excluding revaluation reserves) of at least INR 1 crore as per the latest audited financial results. Track record of distributable profits (excluding extra-ordinary income) in terms of section 205 of Companies Act, 1956 for at least two years out of immediately preceding three financial years, with each financial year being a period of at least 12 months. Otherwise, the net-worth shall be at least INR 3 Crore. Other Requirements
• The post-issue paid up capital of the company shall be at least INR 1 crore.
• The company shall mandatorily facilitate trading in DEMAT securities and enter into an agreement with both the depositories.
• The company shall mandatorily have a website.
• Certificate from the applicant company / promoting companies stating the following : – The Company has not been referred to the Board for Industrial and Financial Reconstruction (BIFR), although the Companies which are out of BIFR are allowed. – There is no winding up petition against the company that has been accepted by a court.
In addition to the above requirements, a visit to the company’s site will be undertaken by the Exchange before granting of approval to use the name of the exchange in the offer document. It shall also be desirable for the Company to file a compliance certificate by a Practicing Company Secretary as per the guidance note issued by the Institute of Company Secretaries of India as an additional eligibility criteria issued by BSE through its circular dated 26-11-2012. Promoters will mandatorily be required to attend an interview with the Listing Advisory Committee. Migration from BSE SME Exchange to the main Board of BSE:
Eligibility Criteria for NSE Emerge
NSE Emerge stipulates the following eligibility criteria for an applicant desired of getting listed on NSE Emerge platform :
The post issue paid up capital of the company (face value) shall not be more than INR 25 crore.. The company should have track record of at least 3 years. The company should have positive cash accruals (earnings before depreciation and tax) from operations for at least 2 financial years preceding the application and its net-worth should be positive.The applicant Company has not been referred to Board for Industrial and Financial Reconstruction (BIFR). No petition for winding up is admitted by a Court of competent jurisdiction against the applicant Company. No material regulatory or disciplinary action by a stock exchange or regulatory authority in the past three years against the applicant company. The following matters should be disclosed in the offer document:
• Any material regulatory or disciplinary action by a stock exchange or regulatory authority in the past one year in respect of promoters/promoting company(ies), group companies, companies promoted by the promoters/promoting company(ies) of the applicant company.
• Defaults in respect of payment of interest and/or principal to the debenture/bond/fixed deposit holders, banks, FIs by the applicant, promoters/promoting company(ies), group companies, companies promoted by the promoters/promoting company(ies) during the past three years. An auditor’s certificate shall also be provided by the issuer to the exchange, in this regard.
• The applicant, promoters/promoting company(ies), group companies, companies promoted by the promoters/promoting company(ies) litigation record, the nature of litigation and status of litigation.
• In respect of the track record of the directors, the status of criminal cases filed or nature of the investigation being undertaken with regard to alleged commission of any offence by any of its directors and its effect on the business of the company, where all or any of the directors of issuer have or has been charge-sheeted with serious crimes like murder, rape, forgery, economic offences etc.
Parameters Main Board SME Exchange
Post – issue paid up capital (Face value) Not less than INR 10 crore Any amount less than INR 25 crores
Minimum number of allotees 1000 50
IPO Application Size INR 10,000 – INR 15,000 Minimum of INR  1,00,000
Observation on DRHP By SEBI By Exchange
IPO Grading Mandatory Non Mandatory
Track record Three years of track record of profitability Relaxed norms of Track record
IPO Underwriting Mandatory (however, not required where 50% of the issue offered for subscription to QIB’s) Mandatory (100% underwritten, out of which 15% compulsorily by Merchant Banker)
Time Frame for Listing 6-8 months 2-3 months
Reporting Requirements Quarterly Half Yearly
Global Comparison of SME Exchanges
Country UK Japan Singapore China
SME Exchange AIM MOTHERS CataList Chinext
Date of Induction 1995 1999 2007 2009
No. of Companies 2494 178 134 356
Market Capitalization GBP 60622 million N/A N/A RMB 2.7 trillion(Dec 2011)
Average Monthly Turnover GBP 3410.7 million 2000 million Yen N/A 16,830 million Yuan
Relative Main Board London Stock Exchange NIKKEI SGX Shanghai Stock Exchange
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