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Avenue of Capital Raising for Startups

Manu ThomasSr. Manager,

Listing Compliance, BSE Ltd.

Capital Market Week Program - Jun. 2, 2015

Definition of SME

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Classification of Micro, Small and Medium Enterprises

As per Micro, Small & Medium Enterprises Development (MSMED) Act, 2006

As per SEBI ICDR Regulation, it is defined based on Post Issue paid up capital of the Company

Robustness of SME Industry

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Despite two global crises of 2008 and

2011, India’s avg. GDP increased from

7.6% in 10th 5 year plan (2002-2007) to

7.9% in the 11th 5 year plan (2007-12)

thanks to the SME Sector which

consistently registered higher growth

than the overall growth of the industry

i.e. by an average growth of 13% every

year in the 11th 5 year plan

Contribution by SMEs to the Indian Economy

8.72% of Country’s GDP

45% of manufacturing output

40% of Exports

Employs about 7 crore people in over 260 lakh units

SME sector growing at over 8% per year

50% of SMEs owned by disadvantaged group of society

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After own funding, Bank Finance is by and far the largest source of Financing for the SMEs at the startup stage

Banks have become increasingly constrained in their ability to lend money to high risk areas which includes ventures or start-ups

Banks has to match risks of funding as against the returns SME offers coupled with high debt equity ratio

Almost impossible to assess the correct valuation of startups which are in a new business segment

Cost of fund and time for each investment for the startups

is very high

Startups complain about the stringent conditions

There is a need for funding for SME through alternative sources - Capital Market

Fund raising challenges of Startups

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Advantages of fund raising through Cap. Market for startups

Entrepreneur - Platform to raise Capital

Non-retail Investors – Opportunity to invest at nascent stage in prospective future, protect their interest by ensuring full disclosures

Company - Unleash its valuation, tradable currency, liquidity

Retail Investor :– tax benefit in terms of long term capital gain due to STT– Safety as there is 3 year mandatory Market Making

Employees – another avenue to incentivise employees by ESOPS / ESPS

Economy – Mobilize savings for economic development

Exchange – can effectively discharge its role as an important MII

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Avenues of Capital raising for startups

SEBI has taken various steps in the recent past to enable Start-ups and SME to raise funds through various routes such as -

i) SME Segment – Introduced Chapter XA on Apr. 13, 2010

ii) Institutional Trading Platform – Introduced Chapter XC on Oct 8, 2013

iii) Alternate Capital Raising Platform (ACRP) –Discussion Paper Apr. 2015

iv) Crowdfunding (Consultation Paper) - Jun 17, 2014

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SME PlatformA(i)

Regulatory requirement

Mandatory – Post Issue face value capital up to Rs. 10 crores

Optional - Post Issue face value capital < Rs. 10 crores up to Rs. 25 crores

Market Making – Mandatory for 3 yrs from listing date. MB to be responsible for market making effort thru registered MMs

Underwriting – 100% of the offer of which at least 15% by Lead Manager

Net Issue Size – Min. 25% of Post Issue face value capital.

Min. Application Size & Trading lot – Rs. 1 lakh

Number of allottees – Min. 50

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Any SME on BSE SME Platform having a paid up capital more than Rs. 10 crorescan move to the main board provided that the special resolution is passed in theAGM in favor with at least two third of the number of votes cast by the publicshareholders and then apply to BSE SME.

The SME migrating to the main board has to

– Complete 2 yrs of listing on the SME segment

– comply with all the main board norms like minimum 500 investors

– Pay main board listing fees

– Comply quarterly compliance etc.

Migration from SME Platform to Main Board

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SME platform V/s Main board listing – regulatory aspect

SEBI approval not required unlike for Main Board listing

BSE has suo moto set up LAC and also instituted mandatory Site Visits

Minimum of 50 investors required instead of 1000 in other public issues

Lower eligibility norms compared to main board – exemptions under ICDR Reg.

Post issue paid-up capital min Rs.3 crore & max Rs. 25 crores - compared to

threshold of Rs.10 crores in normal IPOs

Simplified compliance - Half yearly reporting instead of Quarterly

Abridged version of Annual Report instead of entire Annual Report

Compulsory Market Making unlike in Main board

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BSE Eligibility Criteria for Listing on SME

Net Tangible Assets – Min. Rs. 3 crore

Net worth – Min. Rs. 3 crores (Ex. Revaluation reserves)

Distributable profits – Min. 2 yrs out of preceding 3 FYs (of min. 12 months)

Or pre issue Net worth – Min. Rs 5 crores

Post-issue paid up capital – Min. Rs. 3 crores

No change in promoters in the preceding 1 yr from date of filing with BSE

Mandatory trading in demat mode, signing with depositories

Mandatory to have Company website and site visit done

Certificate from applicant company / promoting companies –

a) The Company has not been referred to BIFR (where company has emerged out of BIFR status - they are allowed)

b) No winding up petition against company as accepted by a court

Promoters required to attend interview with Listing Advisory Committee

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Number of companies listed so far = 93

Number of SME Companies migrated to Main Board = 4

No. of companies where approval has been given – 9/ No. of companies where DRHPs have been filed and waiting for approval – 14

Total funds raised by 93 companies – Rs. 708.75 Crores

Total Market Capitalisation – Rs. 8358.50 Crores

Number of Market Makers registered with BSE SME – 89

SME IPO index launched on 14th December 2012 with 100 as base (Value as on 29th May 2015 –942.29)

Statistics-SME Platform

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No. of Issues BSE NSE

SMEs Listed 93 7

Market-share 93% 7%

* As on 31st May 15

0

2

4

6

8

10

12

14

Q2'14 Q3'14 Q4'14 Q1'15 Q2'15 Q3'15 Q4'15

9 9

11

78

13

3

01 1

0 01

0