SME’s IPO

Definitions

(a) “Main Board” means a recognized stock exchange having nationwide trading

terminals, other than SME exchange;

(b) “nominated investor” means a qualified institutional buyer or private equity fund,

who enters into an agreement with the merchant banker to subscribe to the issue in

case of under-subscription or to receive or deliver the specified securities in the marketmaking process;

Explanation: “private equity fund” means a fund registered with any regulatory

authority or a fund established by any person registered with any regulatory authority;

(c) “SME exchange” means a trading platform of a recognised stock exchange having

nationwide trading terminals permitted by the Board to list the specified securities

issued in accordance with this Chapter and includes a stock exchange granted

recognition for this purpose but does not include the Main Board;

SEBI Guidelines for SMEs IPO

1. Maximum Post Issue capital - Rs.25 crores
2. Minimum no. of members for Issue - 50
3. Market making - Mandatory for 3 years
4. Underwriting - 100% (Merchant Bankers to underwrite 15% in own account)
5. Issue Lot size - No. of shares depending on IPO price band
6. Trading Lot size - Multiples of Rs.100,000/-
7. After listing, no minimum number of members required to be continued

SEBI had granted the approval to Bombay Stock Exchange Ltd. for setting up the 'SME Exchange / Platform'.

In addition to the various Guidelines issued by SEBI from time-to-time, the BSE SME Exchange has stipulated the following eligibility Norms for Listing on SME Exchange / Platform

·         Net Tangible assets of at least Rs. 1 crore as per the latest audited financial results.

• Net worth (excluding revaluation reserves) of at least Rs. 1 crore as per the latest audited financial results.
• Track record of distributable profits in terms of sec. 205 of Companies Act, 1956 for at least two years out of immediately preceding three financial years and each financial year has to be a period of at least 12 months. Extraordinary income will not be considered for the purpose of calculating distributable profits. Otherwise, the networth shall be at least Rs. 3 Crores.
• Other Requirements:
  The post-issue paid up capital of the Company shall be at least Rs. 1 crores. The Company shall mandatorily facilitate trading in demat securities and enter into an agreement with both the depositories. Companies 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).
  Note: Cases where Company is out of BIFR are allowed. There is no winding up petition against the Company that has been accepted by a court.
• Listing Process will also involve:
  For listing on BSE SME platform promoters will mandatorily be required to attend an interview with the Listing Advisory Committee.

Procedure for issue of IPO for SMEs :

1.      Conversion of Company into Public Limited Company, if applicable

2.      Preparation of Documents for conversion and submission to ROC for approval i.e. Alteration of Memorandum, Articles & filing of necessary forms for appointment of aforesaid directors

3.      ROC approval accorded for conversion

4.      Identification & appointment of Registrar & Transfer Agents & Submission of Master Creation forms with NSDL, CDSL for establishing connectivity

5.      Appointment of Managing Director, Whole Time Director, Independent Directors, Company Secretary & deciding about their remuneration, sitting fees etc.

6.      Constitution of committees - Audit, Shareholder Grievance, Remuneration etc. As per SME Listing Agreement

7.      Preparation of website of the Company & hosting code of conduct on the website

8.      Signing of Tri-Partite Agreement with NSDL & CDSL and receipt of ISIN

9.      Identification & appointment of peer review auditors & getting the financials of last 5 years restated and for last 1 year re-audited from peer review auditors as per SEBI (ICDR) Regulations, 2009

10.  Appointment of Merchant Banker & Market Maker

11.  Preparation of Project Report and Red Herring Prospectus (RHP)

12.  Filing of Red Herring Prospectus (RHP) with stock exchange & SEBI (only for hosting) along with application for in-principle approval with stock exchange

13.  Clearance from stock exchange

14.  Filing of Red Herring Prospectus (RHP) with ROC & getting it cleared from ROC

15.  Filing of Final Prospectus with Stock exchange and SEBI

16.  Opening of the Issue

17.  Closing of the Issue

18.  Allotment of shares

19.  Filing of listing application with Stock exchange

20.  Receipt of listing approval from Stock exchange

21.  Filing of corporate action form with NSDL & CDSL and demat credit of shares

22.  Filing of trading application with Stock exchange

23.  Receipt of trading approval from Stock exchange

Filing of Offer Document and Due Dilligence Certificate

1. The issuer making a public issue or rights issue of specified securities under this Chapter shall not file the draft offer document with the Board.

Provided that the issuer shall file a copy of the offer document with the Board through a merchant banker, simultaneously with the filing of the prospectus with the SME exchange and the Registrar of Companies or letter of offer with the SME Exchange:

Provided further that the Board shall not issue any observation on the offer document.

1. The merchant banker shall submit a due-diligence certificate as per Form A of Schedule VI including additional confirmations as provided in Form H of Schedule VI alongwith the offer document to the Board.
2.  The offer document shall be displayed from the date of filing in terms of sub-regulation (1) on the websites of the Board, the issuer, the merchant banker and the SME exchange where the specified securities offered through the offer document are proposed to be listed.

Underwriting by merchant bankers and underwriters

1.      The issue made under this Chapter shall be hundred per cent. underwritten.

Explanation: The underwriting under this regulation shall be for the entire hundred percent of the offer through offer document and shall not be restricted upto the minimum subscription level.

2.      The merchant banker/s shall underwrite at least fifteen per cent of the issue size on his/ their own account/s.

3.      The issuer in consultation with merchant banker may appoint underwriters in accordance with Securities and Exchange Board of India (Underwriters) Regulations, 1993 and the merchant banker may enter into an agreement with nominated investor indicating therein the number of specified securities which they agree to subscribe at issue price in case of under-subscription.

4.      If other underwriters fail to fulfill their underwriting obligations or other nominated investors fail to subscribe to unsubscribed portion, the merchant banker shall fulfill the underwriting obligations.

5.      The underwriters other than the merchant banker and the nominated investors, who have entered into an agreement for subscribing to the issue in case of under-subscription, shall not subscribe to the issue made under this Chapter in any manner except for fulfilling their obligations under their respective agreements with the merchant banker in this regard.

6.      All the underwriting and subscription arrangements made by the merchant banker shall be disclosed in the offer document.

7.      The merchant banker shall file an undertaking to the Board that the issue has been hundred per cent. underwritten along with the list of underwriters and nominated investors indicating the extent of underwriting or subscription commitment made by them, one day before the opening of issue.

Migration Norms from Main Board to SME and Viceversa:

1.                  Migration from BSE SME Exchange to the Main Board of BSE:

·         Any SME on BSE SME Platform with paid up capital more than Rs. 10 crores can move to the main board, provided shareholders approval by postal ballot such that votes cast by public shareholders in favour of shifting are at least 2 times the number of votes cast by public shareholders against the proposal and then apply to BSE Main Board. In addition to that, the Companies seeking migration to Main Board of BSE should satisfy the eligibility criteria as specified in 26(1) of SEBI (ICDR) Regulations, 2009 either at the time of initial listing on SME platform or at the time of seeking migration to Main Board. However, same will not be applicable where the Company had sought listing on SME platform by following the process and requirements prescribed in 26(2) (a) of SEBI (ICDR) Regulations, 2009.

2.                  Migration From Main Board To SME Exchange:

·         Shareholders approval by postal ballot such that votes cast by public shareholders in favour of shifting are at least 2 times the number of votes cast by public shareholders against the proposal.

·         Face value capital should be less than Rs. 25 crores.

All eligibility criteria of SME exchange must be fulfilled

Market Making

1.      The merchant banker shall ensure compulsory market making through the stock brokers of SME exchange in the manner specified by the Board for a minimum period of three years from the date of listing of specified securities issued under this Chapter on SME exchange or from the date of migration from Main Board in terms of regulation 63[106T], as the case may be.

2.      The merchant banker may enter into agreement with nominated investors for receiving or delivering the specified securities in the market making subject to the prior approval by the SME exchange where the specified securities are proposed to be listed.

3.   The issuer shall disclose the details of arrangement of market making in the offer document.

 4.  The specified securities being bought or sold in the process of market making may be  transferred to or from the nominated investor with whom the merchant banker has entered into an agreement for the market making:

Provided that the inventory of the market maker, as on the date of allotment of the specified securities, shall be at least five per cent. of the specified securities proposed to be listed on SME exchange.

5.   The market maker shall buy the entire shareholding of a shareholder of the issuer in one lot, where value of such shareholding is less than the minimum contract size allowed for trading on the SME exchange:

Provided that market maker shall not sell in lots less than the minimum contract size allowed for trading on the SME exchange.

6.   Market maker shall not buy the shares from the promoters or persons belonging to promoter group of the issuer or any person who has acquired shares from such promoter or person belonging to promoter group, during the compulsory market making period laid down under sub-regulation

7.   The promoters’ holding shall not be eligible for offering to the market maker under this Chapter during the period specified in sub-regulation (1):

Provided that the promoters’ holding which is not locked-in as per these regulations can be traded with prior permission of the SME exchange, in the manner specified by the Board.

8.      Subject to the agreement between the issuer and the merchant banker/s, the merchant banker/s who have the responsibility of market making may be represented on the board of the issuer.

Comparison of Listing and Compliance Norms of SME Exchange with Main Board

How does the SME exchange benefit the Small and Medium Enterprises (SME)

• Listing provides an opportunity to the corporates / entrepreneurs to raise capital to fund new projects / undertake expansions / diversifications and for acquisitions.
• This mode of fund raising through infusion of equity can help the Companies to raise borrowed funds at efficient rate.
• Equity financing lowers the debt burden leading to lower financing costs and healthier balance sheets for the firms.
• Listing also provides an exit route to private equity investors as well as liquidity to the ESOP-holding employees. SME Listing channelizes meaningful Schemes. Listing pre supposes good Corporate Governance which results in sustainability of the Company.
• Listing also helps generate an independent valuation of the company by the market.
• Listing raises a company's public profile with customers, suppliers, investors, financial institutions and the media.
• A listed company is typically covered in analyst reports and may also be included in one or more of indices of the stock exchanges.
• An initial listing increases a company's ability to raise further capital through various routes like preferential issue, rights issue, Qualified Institutional Placements and ADRs / GDRs / FCCBs, and in the process attract a wide and varied body of institutional and professional investors.
• Listing leads to better and timely disclosures and thus also protects the interest of the investors.
• Listing provides a continuing liquidity to the shareholders of the entity. This in turn helps broaden the shareholder base.
• Listed companies generally find that the market perception of their financial and business strength is enhanced.
• Tax Benefits -
  • The sale of unlisted shares in short term attract the capital gain tax upto 30% as applicable to the tax payer and the long term capital gain tax of 10% without indexation and 20% with indexation.
  • The sale of listed securities in the short term attract the capital gain tax of 15% and there is no long term capital gains tax provided it has been subject to STT. This makes it clear that the listing of shares on SME is very attractive.
• All Companies listed on SME Exchange can anytime migrate to the main Board of BSE provided shareholders approval is accorded.

Savings in Cost of Raising an IPO through SME platform