Small is the next big thing
October 8, 2012
“Investment Opportunities made more favorable by BSE & NSE for SME Platforms”
Leading bourses BSE and NSE launched their SME exchange platforms to enable small and medium enterprises to raise funds and get listed as public entities. While BSE kick-started its SME platform under the brand name of BSE SME Exchange with listing of BCB Finance, NSE followed suit by announcing the launch its own platform 'Emerge'.
On the face of it, this exchange should be a god-sent for India's 26 million SMEs who suffer a chronic problem accessing capital. So where India's Big Two -- the National Stock Exchange and BSE -- stipulate a minimum paid-up capital of Rs 10 crore (Rs 100 million), companies with lower paid-up capital can raise as little as Rs 50 lakh (Rs 5 million) on this new SME platform.
According to the Securities and Exchange Board of India, the new platform has been formulated after a detailed study of best practices from across the world and feedback from market participants. It has also taken into account learning from past attempts. One was Over-the-counter Exchange of India, launched in 1990 with aim of becoming the Nasdaq of India; it introduced many concepts that were new to the Indian capital markets then such as screen-based nationwide trading, sponsorship of companies, market making and scripless trading.
However, the 1992 scam and the bear market that followed killed the initiative. BSE Indonext, launched by then Finance Minister P Chidambaram in 2007, was specially created to cater to SMEs listed on regional stock exchanges. Since regional stock exchanges were unable to attract trader attention for lack of advanced technology, BSE tried to give them a lease of life under the new platform. The companies listed on BSE IndoNext, however, did not attract much market participation either.
So how is the BSE SME different ?
The concept is similar to the OTCEI, but additional safeguards such as 100 per cent underwriting of offerings, easier compliance norms such as half-yearly reporting instead of quarterly for bigger firms, and the provision to migrate to the main board have been put in place. Sebi has also waived listing conditions such as profitability for three years, approval of prospectus by Sebi and so on.
The SME exchange is off the blocks with BCB Finance, a Mumbai-based firm, launching its first IPO.
Why the SME exchange needs a big hand:
As Small and Medium Enterprises (SMEs), particularly in developing countries like India, are the backbone of the Nation's Economy. They constitute the bulk of the industrial base and also contribute significantly to their exports as well as to their Gross Domestic Product (GDP) or Gross National Product (GNP). Micro, Small and Medium Enterprises (MSMEs) contributes 8% of the country's GDP, 45% of the manufactured output and 40% of our exports. It provides employment to about 6 cr. people through 2.6 cr. enterprises.
The Micro Small and Medium Enterprise (MSME) sector forms the largest generator of employment in the Indian economy. It forms a major portion of the industrial activity.
SMEs play a very important role in the development of the economy. They have been a key engine of economic growth, job creation, wealth distribution and effective mobilization of resources (capital and skills). SMEs in India present a very vibrant and diversified profile in terms of sectors, stage and geographic locations. Indian SMEs operate in sectors which are very traditional to the most modern and cutting edge industries competing with the best in the world. SMEs in new economy sectors like IT, IT enabled, organized retailing, education, entertainment, media, etc. represent the new and modern face of Indian SMEs. Indian SMEs are also taking an active role in social sectors and very innovative business models are being proposed to solve the innumerable problems of rural population in areas like financial inclusion, healthcare, education, etc.
The Prime Minister's Task Force (Jan. 2010) has recommended to set-up a dedicated Stock Exchange/ Platform for SME. SEBI has also laid down the regulation for the governance of SME Exchange/Platform. Bombay Stock Exchange Ltd, an Exchange which has founded the equity cult in the country has witnessed many companies becoming big from small by raising funds from Capital Market.
On recognition of the need for making finance available for to small and medium enterprises SEBI has decided to encourage promotion of dedicated Platforms for listing and trading of Securities issued by the Small and Medium Enterprises (SME’s). Securities and Exchange Board of India (SEBI) accorded approval to the proposed SME Exchange by BSE Ltd. on September 27, 2011.
The necessary changes and amendments are being made in the rules, bye-laws and regulations of the cash market for making a provision for SME exchange. The listing norms have been extremely simplified and made convenient for SMEs compared to listing norms on the main board.
Highlights of SME Exchange:
- Provide 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 investors’ base which in turn will help for getting secondary equity financing, including private placement
- Enhance Company’s visibility. Media coverage can provide SMEs with greater profile and credibility leading to increase in the value of the shares
- Incentive for greater venture capital participation by providing them an exit route
- Greater incentive for the employees as they can participate in the ownership of the company and benefit from being 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 for debt capital and Capital Market for equity capital
- Initiating a dedicated Stock Exchange for SMEs will lead to diversification of resources of finance and help build a bridge between the SMEs, Private Equity and the Venture Capital by providing an exit route
- Access to capital and future financing opportunities
- Increased visibility and prestige
- Venture Capital (VC)
- Liquidity for shareholders
- Create employee incentive mechanisms
- Facilitate growth through Mergers and Acquisitions
- Encourages Innovation & Entrepreneurial Spirit
- Efficient Risk Distribution
- Employees Stock Options
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