Background
The role of micro, small and medium enterprises (MSMEs) in the economic and social development of our country is well established. The MSME sector is a nursery of entrepreneurship, often driven by individual creativity and innovation. This sector contributes 8 per cent of the country’s GDP, 45 per cent of the manufactured output and 40 per cent of its exports. There are more than 2.6 crores such enterprises responsible for providing employment to about 60 million persons. The labour to capital ratio in MSMEs and the overall growth in the MSME sector is much higher than in the large industries.
The contribution of SMEs in the development of Indian economy has been significant, both in terms of contribution to GDP and creation of employment opportunities. With the Indian economy poised to grow rapidly, the need of SMEs to raise capital is becoming increasingly critical.
Also, the MSME sector in India is highly heterogeneous in terms of the size of the enterprises, variety of products and services produced and the levels of technology employed. While one end of the MSME spectrum contains highly innovative and high growth enterprises, more than 94 per cent of MSMEs are unregistered, with a large number established in the informal or unorganized sector.
Absence of a formal & organized structure and framework poses difficulty in raising funds. Those enterprise who still manage to raise funds, end up paying very high cost for it which eventually in most of the cases makes less economic sense for a business.
Current Basic Requirements for Accessing funds through Primary Equity Market
Today, a company desiring to raise capital against issue of equity shares to Indian public is required to follow the norms prescribed by Securities & Exchange Board of India (SEBI) and also the listing norms prescribed by the recognized stock exchanges in India such as NSE and BSE. As per he existing relevant SEBI guidelines, the issuer company is required to have net tangible assets of at least Rs. 3 Crores in each of the preceding 3 full years, a track record of distributable profits for at least 3 out of immediately preceding 5 years and a net worth of at least Rs. 1 Crore in each of the preceding 3 years. The cost of raising funds from the primary market varies between 6%-12% depending upon the size of the public issue. There are other eligibility conditions too. Besides the same, continuous listing requirements, corporate governance norms and disclosure standards also entails a recurring cost which could be huge for a MSME.
Benefits to MSMEs from a SME Exchange
SEBI has recently taken a fresh look on the listing requirements and continuous listing and disclosure requirements for the SME sector and has decided to allow the NSE and BSE to set up exchanges aimed at small and medium enterprises (SMEs). This decision of SEBI is laudable since an exchange aimed at the SME sector can potentially circumvent an important constraint on SME growth in India.
The key criteria of the decision are: no need for a three-year track record to reduce entry barriers, half-yearly reporting instead of quarterly to reduce reporting costs, a minimum lot size of Rs 1 lakh to limit individuals from undertaking risky trades, and a maximum issue size of Rs 25 crore to prevent larger firms from entering.
Accessing risk or equity capital with low reporting requirements and transaction costs will benefit SMEs in many ways.
Alternate means of raising capital in a fast track mode : Chapter XA of the SEBI ICDR Regulations, 2009 provides for raising of capital by small and medium enterprises which has to be followed by listing on the SME Exchange. The regulations provide relaxations to the SME business in terms of eligibility criteria for listing, thereby opening up another area for raising capital for the SME businesses. In order to fast track the fund raising process, SEBI has also done away with the filing of draft prospectus and vetting of prospectus for SME listing which otherwise is required in case of primary market issuances which is listed on the main stock exchanges.
Opening windows of funding opportunity through Venture Capital Funds: The VC funds and PE funds who fund start up and growth capital respectively, prefer an exit route through listing. Till now, the eligibility conditions for listing made it difficult for SMEs to comply with the listing norms and hence tapping such funds became a bit difficult. The interest of the VCs and other such funds in funding a SME business though having potential was a bit truncated because of their exit preferences. With the SME exchange platform in place, it will open up window of opportunity for SME businesses to access risk capital from VC funds.
Migration from Unstructured to Structured entities: It is common knowledge that almost 94% of the SME business is unstructured in the sense they normally operate under the proprietorship and partnership structure which also in most cases is unregistered. SME businesses find it difficult to obtain funds from the organized lenders such as banks due to their small size, inexperience, lack of professional set up and lack of availability of adequate collaterals. To add to this, banks are also averse to funding entities operating under unorganized structure. Infact, before funding, many banks these days insist the potential borrowers inspite of their strong business model and track record to convert their status from proprietorship/partnership to a limited company. The availability of the SME platform will boost and motivate many SMEs to convert their status to an organized one i.e. to a limited company and also aspire for a professional set up. Availability of institutional capital through SME exchange and VC funds could dramatically help in reducing the unorganized structure which is widely prevalent in the SME sector.
Reduction in trading asymmetry: Presently there are thousands of stocks listed in NSE/BSE which are very very thinly traded and could be categorized as one belonging to the SME businesses which is identified as one having a post issue paid up capital of less than 25 crores. The SME exchange guidelines also provides a mechanism whereby such stocks can migrate from the main exchange to the SME exchange and vice versa. The secondary market trading SME platform will also have a lower transaction cost as compared to the main board. Such a move is a win win situation for both the listed entity and the SME exchange as it would facilitate activity build up on the SME exchange and would also motivate SME businesses to list on SME exchange while accessing risk capital. The option of switching to the main board from SME exchange also is an encouraging provision to SME business which shall have the flexibility to grow more and access more capital once they are in a position to expand their business to the next level.
Besides the above benefits to SME, the SEBI ICDR Regulations for SME business and exchange has made certain breakthrough provisions in the interest of developing a very vibrant SME listing and trading platform. In order to ensure that retail investors take a calculated and research based call before investing into the shares of a SME, a minimum amount of subscription in the primary market and minimum trading lot value in the secondary market has been fixed. Provisions for mandatory underwriting and market making by merchant bankers for the SME’s issue has been enacted to generate sufficient level of participation of all stakeholders in the SME Exchange platform both in the primary and secondary market activities. Reduction in various continuous listing requirements will definitely go a long way in reducing costs for a SME.
Conclusion
Other countries have had a very positive experience with exchanges aimed for the MSME sector. Nasdaq in the US saw the initial listings of Microsoft, Intel and Oracle before they had become large blue-chip firms. AIM in the UK has been another success. Apart from developed western countries, others like Singapore, Korea, Japan and South Africa also offer encouraging examples. Even China now has an MSME-oriented exchange in the form of ChiNext. India has been a latecomer but could gain tremendously from other countries’ experiences. India’s own experience in MSME-oriented stock listings has not been good. Both over-the-counter and independent stock exchanges have failed in the past and it remains to be seen whether the NSE or the BSE can put together a winning package of services for their new SME-focused platforms. The constraints are many, from both the supply and the demand sides. But the critical ones will come from the regulatory end. Sebi will continuously need to balance its objectives of transparency and fair play with low transactions costs and ease of entry for MSMEs. High reporting requirements or other checks and balances may improve transparency and eliminate the bad fish, but they would also increase costs and reduce entry.
No comments:
Post a Comment