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November, 2011

SME exchange

Launching Pad to Unlock Wealth

Presented by: S. Ganapathy SubramanianVice President, Karvy Computershare P Ltd.

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Agenda

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Introduction&

background

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Introduction to MSME

Manufacturing Enterprises – Investment in Plant & Machinery

Description INR USD($)

Micro Enterprises upto Rs. 25 Lakh upto $ 62,500

Small Enterprises above Rs. 25 Lakh & upto Rs. 5 Crore above $ 62,500 & upto $ 1.25 million

Medium Enterprises above Rs. 5 Crore & upto Rs. 10 Croreabove $ 1.25 million & upto $ 2.5 million

The Micro, Small and Medium Enterprises (MSME) are defined as follows:

Service Enterprises – Investment in Equipments

Description INR USD($)

Micro Enterprises upto Rs. 10Lakhs upto $ 25,000

Small Enterprisesabove Rs. 10 Lakhs & upto Rs. 2 Crores

above $ 25,000 & upto $ 0.5 million

Medium Enterprisesabove Rs. 2 Crores & upto Rs. 5 Crores

above $ 0.5 million & upto $ 1.5 million

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The rise and significance of MSMEs in India

Key statistics:

Strength 2.6 crore enterprises

Contribution 8% of GDP

Output 45% of total manufactured output

Trade 40% of our exports

Employment 6 crore people

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Government initiatives

A Micro, Small and Medium Enterprises Act, 2006 was introduced

Its main objectives :

• Remove impediments due to multiple laws

• Introduce statutory consultative and recommendatory bodies on MSME policies

• Improve registration procedures of MSMEs

• Statutory basis for purchase preference and credit policies

• Improve realisation of payments of MSMEs

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Challenges faced by SMEs

Difficulty in raising resources – both debt and equity – for expansion and growth

Government / RBI efforts in this regard have proved to be inadequate

Currently, required resources are raised through bank loans, promoter funds and in a few cases from friends and relatives, VC / PE funding

Considerable effort and time lag in raising resources

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Solution offered

Prime Minister’s Task Force (Jan 2010) recommended setting up of a dedicated stock exchange for SMEs

SEBI has laid down the framework for setting up of a new exchange, or separate platform of an existing stock exchange having nationwide terminals, for SMEs

BSE & NSE have received permission of the regulator for setting up the SME platform

Liberalised regulations for going public

Liberalised norms for listing

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Benefits of listing

Access to capital and future financing opportunities

Increased visibility and prestige

Venture capital

Liquidity for shareholders

Creates of employee incentive mechanisms

Facilitates growth through mergers and acquisition

Encourages innovation and entrepreneurial spirit

Efficient risk distribution

Helps in corporate governance

Better valuation

Improvement in debt-equity ratio

Brings transparency

Greater financial inclusion

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ListingRegulations and procedure

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Why not the conventional listing route?

Following norms (BSE) restrict SMEs from direct listing:

# Particulars Norms

1 Issued and Paid up capital Minimum paid up capital of Rs. 10 crores ORMinimum networth of Rs. 50 crores (excluding revaluation reserves) in 3 immediately preceding financial years

2 Networth

3 Profit making track record Distributable profits in terms of sec. 205 of Companies Act, 1956 for atleast 3 out of 5 immediately preceding financial years based on audited financial results with the last financial year reporting profit. 

Provided that extraordinary income shall not be considered for calculating distributable profit.

Provided further that latest 3 Financial Years should comprise a period of atleast 12 months

4 Public Shareholding Meeting with the requirements of SCRA, SCRR and Listing Agreement.

5 No. of public shareholders Minimum 500

6 Trading in Compulsory Demat Minimum of 50% of the public shareholding should be held in demat form.

7 Listing track record with Recognized Stock Exchange

Listed on any recognized Stock Exchange

8 Information Memorandum Information Memorandum as provided in Schedule II of Companies Act, 1956 to the extent applicable, as certified by the Company Secretary/ MD of the Company

9 Withdrawal/ Rejection Companies can make a fresh application after a period of 3 months

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Special features - listing on SMEs

Special advantages of listing on the SME exchange, over the conventional exchanges:

Lower listing fees

Market makers

Reduced filing requirements – half yearly financial results

Abridged annual reports

No need to publish financial results

No draft document to be filed with SEBI for their observations

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Regulations

Chapter XA of the ICDR deals with issue of specified securities by small and medium enterprises

Key highlights:

General qualification for SMEs is upto Rs. 10 crore face value of post issue capital

However, enterprises with post issue capital of upto Rs. 25 crore, may issue shares under the provisions of this chapter

Offer document to be filed with SME exchange, RoC, and SEBI through a Merchant Banker

Due diligence certificate by Merchant Banker in the prescribed form (Form A and Form H of Schedule VI)

Offer document to be hosted on SEBI, Issuer, Merchant Banker(s) and SME exchange

Issue needs to be 100% underwritten, and not upto the minimum subscription level

Merchant Bankers need to underwrite minimum 15%, in their own account

Nominated investor / market maker

Minimum application and trading lot value – Rs. 1 lakh

Minimum allottees must be 50 in number

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Regulations

Key highlights (Contd...) :

Listed companies issuing shares under chapter XA, shall compulsorily list on SME exchange

Shareholder approval for migration to main exchange and vice versa

Market making compulsory for 3 years from the date of listing or date of migration and disclosure thereof

Market makers shall be stock brokers registered on the SME exchange

Inventory shall be at the least 5% of the listed specified securities as on the date of allotment

Minimum contract size

No deals with promoters / group – except those not under lock-in, with the prior permission of SME exchange

Representative of the Merchant Banker can be on the board of the issuer

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Exemptions

Inapplicable regulations Regulation 6 (1), (2) & (3) – filing of Draft offer document , observations thereon, complying therewith

Regulation 7 – obtention of in-principle approval

Regulation 8 – Documents to be submitted before opening of the issue

Regulation 9 – Making Draft offer public

Regulation 10 – Fast Track Issue

Regulation 25 – Eligibility requirements

Regulation 26 – Conditions for initial public offer

Regulation 27 - Condition for further public offer

Regulation 49 (1) - Minimum application size

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Market Makers’ Obligations

Market makers’ obligationsTo be registered as such with SME exchanges, and act for a minimum period

Two-way quote for 75% of the time in a day

Black out period to be informed

Minimum depth Rs. 1 lakh

Not more than 5 market makers for a scrip

Different rates can be quoted by different market makers

Maximum spread / price bands to be stipulated by SME exchange, or in the offer document

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The issue process

The Issuer who is planning an offer, nominates lead merchant banker(s) as 'book runners’

The Issuer specifies the number of securities to be issued and the price band for the bids

The Issuer also appoints syndicate members with whom orders are to be placed by the investors

The syndicate members input the orders into an 'electronic book'. This process is called 'bidding' and is similar to open auction.

The book normally remains open for a period of 5 days

Bids have to be entered within the specified price band

Bids can be revised by the bidders before the book closes

On the close of the book building period, the book runners evaluate the bids on the basis of the demand at various price levels

The book runners and the Issuer decide the final price at which the securities shall be issued

Generally, the number of shares is fixed, the issue size gets frozen based on the final price per share

Allocation of securities is made to the successful bidders. The rest get refund orders.

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Opportunities for you

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What it means to you?

Opportunity for you

You will be the first point of contact

You can set up merchant banking outfits, subject to acquiring skills to market the issue

Play the role of the legal counsel also

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