The SME Exchange: A Primer
Introduction
Small and Medium Enterprises (SMEs) are the backbone of the Indian economy and contribute to 45% of the industrial output, 40% of India’s exports and employ 69 million people.
They operate in both traditional sectors like manufacturing and modern sectors like IT. Recognizing the special role of SMEs in the India growth story, the Prime Minister’s Task Force recommended setting up a dedicated stock exchange for SMEs in 2010. Subsequently, SEBI issued a circular which laid down the framework for this stock exchange and the SME Exchange was finally launched in March 2012.
In this article, we will give you an overview of the SME Exchange and how that differs from the Main Board listing. Main Board refers to the Bombay Stock Exchange and the National Stock Exchange, the leading stock exchanges in India where companies can list their securities and these securities are then traded.
SME Exchange
The SME Exchange is a dedicated stock exchange for publicly trading the shares or securities of SMEs who would not meet the eligibility criteria for listing on the Main Board but would benefit from access to additional funding to fuel expansion or make acquisitions. The option to access equity financing options will also help SMEs reduce their reliance on debt and give them the ability to expand their investor base. Venture capitalists are more likely to be interested in investing in SMEs as the ability to list will give them an exit route without having to wait to meet the eligibility requirements of the Main Board.
Benefits of listing on SME Exchange
- Increased access to capital and financing opportunities.
- Ability to use shares as currency in lieu of cash considerations (ESOPs)
- Unlocking true valuation of the company
- Offering investors an exit option
- There are no long term capital gains tax for transferring listed shares.
- There is no tax liability for issuing fresh equity shares
- Increased public visibility due to media coverage
- Possible migration to Main Board upon paid-up capital reaching INR 100mn
- Benchmarking of fair value of the business
Listing on the SME Exchange v. the Main Board
| S. No. | Parameters | SME Exchange | Main Board |
|---|---|---|---|
| 1 | Post-Issue Paid-up Capital | Less than INR 25 crores | More than INR 10 crores |
| 2 | Minimum number of allottees | 50 | 1000 |
| 3 | Time Frame | 2-3 months | 6-8 months |
| 4 | Underwriting | 100% Mandatory | Mandatory unless 50% of the issue is offered for subscription to QIBs |
| 5 | Market Making | Compulsory for a minimum period of 3 years | Not mandatory |
| 6 | IPO Grading | Not Mandatory | Mandatory |
| 7 | Minimum Application Size | INR 1 lakh | INR 10,000- INR 15,000 |
| 8 | Observation on DRHP | By the Exchange | By SEBI |
| 9 | Track Record | Distributable profits in 2 of the preceding 3 years | Distributable profits in 3 of the preceding 5 years and a profit in the past year |
| 10 | Reporting Requirements | Half-Yearly | Quarterly |
| 11 | Initial Listing Fee | INR 50,000 | INR 20,000 (BSE) / INR 50,000 (NSE) |
Migration to the Main Board
A company listed on the SME Exchange must compulsorily migrate to the Main Board once its paid-up capital reached INR 25 crores but also has the option to migrate when it reaches a paid-up capital of INR 10 crores as long as it meets the listing requirements of the Main Board.
Conclusion
Listing on the SME Exchange is one of the best ways to raise capital for your expansion plans and increase your investor base.
