Deepening of Markets-Through SME

ExchangesYear 12

Discussion Paper on

WHY SMALL REMAINS SMALL?

By: Aanchal Malhotramalhotra_aanchal2006@yahoo

.co.in

SME Platform – SEBI and BSE guidelines

Face value capital between Rs. 1 to Rs.10 Crores An Issuer with face value capital above Rs. 25 Crores has to be

necessarily listed on the Main Board of the BSE Track record of distributable profits for 2/3 preceding years.

Otherwise, the net-worth should be at least Rs. 3 Crores Net Tangible assets to be at least Rs. 1 Cr. as per latest audited

results Net Worth (excluding revaluations reserves) to be at least Rs. 1

Crore 100% underwritten issues. Merchant Banker/s shall underwrite

15% in their own accounts Merchant Banker to the issue shall be responsible for market

making* for minimum 3 years through a stock broker who is registered as market maker with SME Platform

Minimum IPO size: Minimum 50 investors required while listing IPO; each shall invest Rs. one lakh, amounting to Rs. 50 lakhs

* Market makers in scrip will provide 2-way quotes for 75% of the time during a trading day. They will have to hold 5% of the specified security to be listed at the time of allotment in their inventory to do the market making. In addition to this, the market makers can also buy from or sell to the nominated investors the required shares for market making. The merchant banker and nominated investor need to enter into an agreement in this regard

SME Stock Exchange: An Introduction

Separate exchange for SMEs to be operated under SEBI; to provide a platform for fund raising for SMEs

SEBI has issued a Circular on May 18, 2010 for setting up a stock exchange having nationwide trading terminals for SMEs

A number of SMEs have the potential to grow into big companies, provided they get adequate capital support. The listed SMEs are likely to give better returns on equity for a medium-term to a long-term

Needs to transform itself to a public limited company; all existing members of Main Board can participate

As per the ICDR Regulations, Company has to offer a minimum of 25% of the post-issue, paid-up capital to the investors

BSE’s Main Board has more than 1500 listed companies each of which has paid- up capital of upto Rs. 10 Crores and more than 2500 listed companies each of which has paid-up capital between Rs. 10 Crores and Rs. 25 Crores. These companies may opt to migrate to BSE SME Platform, subject to compliance of applicable provisions

Need for SME Stock Exchange

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Equity financing opportunities to grow their business – from expansion to acquisitions; lower the Debt burden; working capital

Expand investors’ base; secondary equity financing, including private placements

Provides immense opportunity for investors to identify and invest in good SME companies at early stage

Help unleash the valuation of companies and in the process create wealth for all the stakeholders including investors, besides considerable income tax benefits and facility to exit at any point of time

Exit route to venture capitalist; reduction in lock-in period Opens doors to ESOPs/ESPSs

Investors abandoning the market? Can SMEs offer a different

mindset?

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One of the reasons why Indian investor is abandoning the market is the dilution of the fiduciary trusteeship of promoters raising third party money; promoters take unnecessary advantage of minority investors

SME’s: A different mindset Size of promoters’ assets is comparatively small There shall not be very small investors Greater participation by large and institutional players Low levels of published information will warrant greater

interaction with the promoters Time horizon of investment shall be comparatively longer

High Risk; High Return: Investment in SMEs

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Potential for higher growth rates Lower overheads, lower operating leverage Greater adaptability in dynamic business environment Higher probability of abnormal returns in case of takeover by

larger companies Greater risks due to low levels of product diversification Lower levels of corporate governance Greater dependence on key management personnel Lower levels of liquidity More prone to excessive speculative activity

Relaxation for SME Listing

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Requirement of 3/5 years profit making track record Net tangible assets of Rs. 1 cr instead of Rs. 3 Crores Net worth of at least Rs. 1 crore in preceding 3 years waived off SEBI approval to DRHP not required Lower initial and annual listing fees Issuer has to take the approval of the Exchange and SEBI’s

approval is not required In principle approval from stock exchange is not required; IPO

on the BSE SME Platform can be brought in 2-3 months’ vis-à-vis about 8-9 months required for launching an IPO on the Main Board

As per ICDR Regulations, grading is not mandatory for listing Instead of quarterly results to be published, listed SMEs can

publish half yearly results Companies listed on Regional Stock Exchanges are allowed for

direct listing

SME Listing- IPO Stages

From M&A perspective

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Domestic and international investors are inclined to listed SMEs. Listed SMEs are likely to get strategic investments from both, domestic and international investors as well as companies

As a listed public limited company, it’s shares can be utilized as an acquisition currency to acquire target companies, instead of a direct cash offering. Using shares for an acquisition can be a tax- efficient and cost- effective vehicle to finance such a transaction (Acquisition by share swap instead of cash)

Case Studies: Companies Listed on BSE SME

Platform

Company Brief of Business Amount (Rs cr)

1.Max Alert System

Provides solutions for fire fighting, Building Management System

8.0

2.BCB Finance An NBFC advancing loans and investing/trading in securities

8.85

3.Monarch Health

Is in business of Cosmetic Surgery and Skin Care

7.2

4. Sangam Advisors

Investment in securities, Corporate Advisory and Investment Banking

5.1

5.Jupiter Infomedia

A web Infomedia Company with online publications on Business, Encyclopedia and Yellowpages

4.1

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Max Alert SystemEngaged in the business of providing solutions for fire fighting, Building Management System and other allied activities. The Company’s revenues have witnessed a CAGR of 70.9% over the period FY07-FY11. In the same period, PAT has registered a CAGR of 90%

Use of ProceedsSetting up crushing plant

IPO Issue Date June 28- July 02,2012IPO Issue Size Rs. 8 crFixed Price issue Rs. 20/shareFresh Issue 4 mn shares

Issue structure

Market Maker: 15% (0.6 mn shares)Retail: 42.5% (1.7 mn shares)QIB: 42.5% (1.7 mn shares)

Post issue market cap Rs. 18.4 crLead Manager; Market Maker

Comfort Securities Ltd.

Shareholding Pattern %Pre-issue Post-issue

•Promoters and Promoter Group 100 56•Public 44

Financials (Rs. Cr) FY09 FY10 FY11

9 mn FY12

Total Operating Income 200 286 331 313EBDITA % 8% 10% 9% 8%PAT 15 13 17 12PAT % 7% 5% 5% 3%Equity Capital 0.1 2.7 9.5 9.5RONW % 7% 4% 3% 1%ROCE % 3% 3% 2% 2%Adjusted EPS 0.01 1.41 1.88 1.86P/E at IPO Fixed Price 14 11 11

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BCB FinanceIncorporated in 2005, Company operate s as a Non Deposit taking Non-systemically Important NBFC engaged in the business of advancing loans and investing/trading in securities. Provides following types of loan:1. Loan against securities 2. IPO funding 3. Unsecured loans/ bridge loans

Use of Proceeds

To augment capital base; for operations

IPO Issue Date Feb 23- Feb 27,2012IPO Issue Size Rs. 8.85 crFixed Price issue Rs. 25/shareFresh Issue 2.9 mn shares

Issue structure

Market Maker: 22% (0.6 mn shares)Others 78% (2.3mn)

Post issue market cap Rs. 28.76 cr

Lead ManagerAryaman Financial Services

Market MakerIKAB Securities & Investment Ltd.

Shareholding Pattern %Pre-issue Post-issue

• Promoters and Promoter Group 100 69• Public 31

Financials (Rs. Cr) FY09 FY10 FY11

6 mn FY12

Total Operating Income 0.9 1.5 1.5 1.4EBDITA % 28% 27% 33% 21%PAT -0.3 0.2 0.2 0.1PAT % -33% 13% 13% 6%Equity Capital 1.6 1.6 1.6 7.9RONW -2.9% 2.1% 2.1% 0.8%Adjusted EPS -0.4 0.3 0.3 0.2NAV per share 66 67 69 26P/E at IPO Fixed Price     17.6  

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Monarch Health Services Incorporated on 1/10/2011, Monarch

Health Services Ltd is engaged in the business of Cosmetic Surgery and Skin Care

LOOKS Cosmetic Clinic is a venture of Monarch Health Services Pvt Ltd., India’s first ever prototype clinic with a pioneering concept of "One-stop-shop to cater both surgical and non surgical cosmetic and aesthetic treatments for head to toe transformations”

3 mnths revenues for FY12 ending Dec’11 were Rs.0.19 lacs with negative EPS of Rs.19

Use of Proceeds

For opening up 23 new clinics and meeting the working capital requirements

IPO Issue Size Rs. 7.2 crFixed Price issue Rs.40Fresh Issue 1.8 mn

Issue structure

Market Maker: 16.7% (0.3 mn shares)Others 83.3% (1.5 mn)

Post issue market cap Rs. 24 crLead Manager& Market Maker

Networth Stock Broking Ltd

Shareholding Pattern %Pre-issue Post-issue

• Promoters and Promoter Group 10 25• Public 90 75

Thank You

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Disclaimer: The information in the presentation has been excerpts of various material publicly available on the internet