SME Exchange v1

7/21/2019 SME Exchange v1

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Need for SME ExchangeThe need of a dedicated SME Exchange can be attributed to several factors including the following:

A dedicated SME exchange will provide SMEs with equity financing opportunities to grow theirbusiness - from expansion to acquisitions

Listing the company would facilitate expansion of the investors base, which in turn helpcompany get secondary market for equity financing, including private placement.

With the availability of equity financing options, the debt burden can be set lower resulting ina healthier balance sheet and lowered financing cost

Company's visibility will improve with the coverage from analysts and media that can add tothe credence and image of the SME leading to benchmarking its fair value

The listing would result in an increased participation by venture capital players as they wouldhave a ready, transparent and tax-efficient exit route.

Listing would add value to the companies who wish to make use of ESOPs and other stock basecompensation plans as a tool to reward and retain their employees. It is expected to encourageinnovation and entrepreneurial spirit, much required from the perspective of Indian nationaleconomy.

Capital Market allows distribution of risk efficiently by transferring risk to those who are bestable to bear it.

SME sector will grow better on two pillars of financial system, i.e., Banking for debt capital andCapital Market for equity capital.


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Key Benefits

Funding Convenience

Access to capital and financing opportunities:

Going public provides SMEs with equity financing opportunities to grow their business fromoperations to expansion to inorganic acquisitions. Access to equity financing lowers the debtburden leading to lower financing costs and healthier balance sheets. The continuing requirementfor adhering to stock market rules for the issuers lowers the ongoing information and monitoringcosts for the banks.

M&A currency:

Listed shares act as a currency, esp. for inorganic business acquisition transactions. Listed sharescan be utilized as an acquisition currency, as an alternative to cash consideration, to acquire

existing businesses / assets. Using shares as a currency can be a tax efficient and cost effectivevehicle to finance an acquisition transaction.

Premium Valuation:

Valuation of a company is determined by various factors, one of which is class of company listedor closely-held. The value discounting by investors of an unlisted entity can be avoided, if theshares are listed on a nation-wide exchange platform including SME Exchange.

Efficient Risk Distribution for Investors:

It is expected that the development of capital markets helps distribute risk efficiently by transferof risk to those best able to bear it. Capital is a precious resource. When one can afford, he caninvest it; when one needs it back, he can exit. This in-built mechanism of risk-transfer, in turn,lends to sustainability to market forces. Thus capital markets for SMEs are also expected to ensurethat capital flows to its best uses and even the riskier activities with higher payoffs could befunded.

Entry & Exit Platforms for PE / Other Investors:

The presence of a market-driven transparent trading platform provides with a ready and easy entryand exit for strategic investors. Listing not only offers the investors flexibility for entry and exit,but also the confidence required for any such


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Tax Benefits

Income- tax Act offers immense benefits to companies if their shares are listed on recognized stockexchanges including SME Exchange. Tax benefits, often, turns out to be one of prominent factors forlisting:

No Long-term Capital Gains Tax

Transfer of unlisted shares attracts long term capital gains tax of 20% and short term capital gains(shares held less than 36 months) of up to 30% (depending upon an assessee's income slab andapplicable tax rate). Whereas in case of listed shares, tax on long term capital gains is nil and shortterm capital gains is 15%, provided the transaction has been subjected to securities transaction tax(STT). This preferential tax treatment on transfer of listed shares is also available to shares listedon SME Exchange. Listing on SME Exchange is a valid tax-planning tool and could, thus, lead toenormous tax saving for SME entrepreneurs / investors.

No tax on fresh equity infusion in the company

The Tax liability on fresh issuance of equity shares by an unlisted company to investors other than"Registered Venture Fund", if the issuance is made at a value more than the fair value. This couldmake SMEs subject to heavy tax outgo, since they often go for fund raising through equity issuanceto investors. Such a tax liability, however, does not attract if the shares of the company are listedon recognize stock exchanges, including SME Exchange.

No tax on distressed business purchase

Income-tax Act levies a tax inter alia on the buyer of shares of an unlisted company, if thetransaction is conducted at a value less than its book value. Hence acquisition of distressed assetscould attract heavy tax. Such a tax liability, however, does not attract if the shares of thecompany are listed on recognize stock exchanges, including SME Exchange.

Efficient Risk Distribution for Investors:

It is expected that the development of capital markets helps distribute risk efficiently by transferof risk to those best able to bear it. Capital is a precious resource. When one can afford, he caninvest it; when one needs it back, he can exit. This in-built mechanism of risk-transfer, in turn,lends to sustainability to market forces. Thus capital markets for SMEs are also expected to ensurethat capital flows to its best uses and even the riskier activities with higher payoffs could befunded.

Entry & Exit Platforms for PE / Other Investors:

The presence of a market-driven transparent trading platform provides with a ready and easy entryand exit for strategic investors. Listing not only offers the investors flexibility for entry and exit,but also the confidence required for any such transaction.


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Other Benefits

Visibility Profile Building

Going for a public issue is most likely to enhance the company's visibility. Greater public awarenessgained through media coverage, and research coverage by sector investment analysts provide the

SMEs with greater visibility and help brand building which otherwise may remain a dream especiallyfor SMEs.

Unlocking / Benchmarking Value

The fair value of an unlisted company may not be benchmarked appropriately, in absence of amarket-driven mechanism. The companies listed on a stock exchange are traded and the marketforces are expected to establish their fair value or near-fair value. This leads to unlocking orbenchmarking of fair value of the SME businesses.

Incentive Mechanism for Employees

The employees of an SME can participate in the ownership and benefit from being a shareholder.This can serve to ensure stronger employee commitment to the company's performance andsuccess. ESOPs and any other share-based compensation plan of listed company have an immediateand tangible value to employees. This, in turn, serves as a talent retention tool.

Benefit for Companies in Supply Chain

The companies in supply chain in the forward or backward integration may take strategic stake aspart of growth & expansion. Also, companies in the same business line planning to expand theoperations may take a stake in listed SMEs.

Governance Internal Systems

Though the requirements for a company listed on SME Exchange are not as stringent as that forMain Board listed companies, nevertheless SME listing ensures that the company has drawn up theinternal control systems and set up minimum required framework of corporate governance. This, inturn, lends sustainability to the business.


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Difference between Main Board & SME Exchange

Parameters Main Board SME Exchange

Post issue paid upcapital (Face value)

Not less than INR 10 crore Any amount less than INR 25crores

Minimum number ofallotees

1000 50

IPO Application Size INR 10,000 - INR 15,000 Minimum of INR 1,00,000

Observation onDRHP

By SEBI By Exchange

IPO Grading Mandatory Non Mandatory

Track record Three years of track record ofprofitability

Relaxed norms of Track record

IPO Underwriting Mandatory (however, notrequired where 50% of theissue offered for subscriptionto QIBs)

Mandatory (100%underwritten, out of which15% compulsorily by MerchantBanker)

Time Frame forListing

6-8 months 2-3 months

ReportingRequirements

Quarterly Half Yearly


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Eligibility Criteria

Besides, SEBI norms, the stock exchanges have also prescribed eligibility criteria for listing on theirrespective SME Exchange:

Eligibility Criteria for BSE SME

BSE SME Exchange stipulates the following eligibility criteria for an applicant desired of getting listedon BSE SME Exchange :

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

Net-worth (excluding revaluation reserves) of at least INR 1 crore as per the latest auditedfinancial results.

Track record of distributable profits (excluding extra-ordinary income) in terms of section 205 ofCompanies Act, 1956 for at least two years out of immediately preceding three financial years,

with each financial year being a period of at least 12 months. Otherwise, the net-worth shall be atleast INR 3 Crore.

Other Requirements The post-issue paid up capital of the company shall be at least INR 1 crore. The company shall mandatorily facilitate trading in DEMAT securities and enter into an

agreement with both the depositories. The company 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 FinancialReconstruction (BIFR), although the Companies which are out of BIFR are allowed.There is no winding up petition against the company that has been accepted by a court.

In addition to the above requirements, a visit to the company's site will be undertaken by theExchange before granting of approval to use the name of the exchange in the offer document.

It shall also be desirable for the Company to file a compliance certificate by a Practicing CompanySecretary as per the guidance note issued by the Institute of Company Secretaries of India as anadditional eligibility criteria issued by BSE through its circular dated 26-11-2012.

Promoters will mandatorily be required to attend an interview with the Listing AdvisoryCommittee.

Migration from BSE SME Exchange to the main Board of BSE:


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Eligibility Criteria for NSE Emerge

NSE Emerge stipulates the following eligibility criteria for an applicant desired of getting listed on NSEEmerge platform:

The post issue paid up capital of the company (face value) shall not be more than INR 25 crore.

The company should have track record of at least 3 years.

The company should have positive cash accruals (earnings before depreciation and tax) fromoperations for at least 2 financial years preceding the application and its net-worth should bepositive.

The applicant Company has not been referred to Board for Industrial and Financial Reconstruction(BIFR).

No petition for winding up is admitted by a Court of competent jurisdiction against the applicant

Company.

No material regulatory or disciplinary action by a stock exchange or regulatory authority in the pastthree years against the applicant company.

The following matters should be disclosed in the offer document: Any material regulatory or disciplinary action by a stock exchange or regulatory authority in

the past one year in respect of promoters/promoting company(ies), group companies,companies promoted by the promoters/promoting company(ies) of the applicant company.

Defaults in respect of payment of interest and/or principal to the debenture/bond/fixeddeposit holders, banks, FIs by the applicant, promoters/promoting company(ies), groupcompanies, companies promoted by the promoters/promoting company(ies) during the pastthree years. An auditor's certificate shall also be provided by the issuer to the exchange, inthis regard.

The applicant, promoters/promoting company(ies), group companies, companies promotedby the promoters/promoting company(ies) litigation record, the nature of litigation andstatus of litigation.

In respect of the track record of the directors, the status of criminal cases filed or natureof the investigation being undertaken with regard to alleged commission of any offence byany of its directors and its effect on the business of the company, where all or any of thedirectors of issuer have or has been charge-sheeted with serious crimes like murder, rape,forgery, economic offences etc.

Documents

SME Exchange v1