Running your start-up or SME business and expanding the business is not a ‘piece of cake. You may need a constant influx of funds for growth & developmental purposes. Though start-ups engaged in the manufacturing sector or trading sector can avail of startup bank loans for investment in building, machinery, and inventory through term loans or working capital loans, however, traditional lenders like banks or financial institutions do not prefer to fund expenses such as research & development or marketing, etc. Therefore, start-ups and their founders get a hard time raising funding, and consequently, only a few of those manage to get venture capital funded.
Thus, the SEBI proposed the creation of an SME Exchange in India where small & medium businesses & start-ups could list their shares. The year 2021 was a remarkable year for start-ups when start-ups like Nykaa, Zomato, EaseMyTrip, CarTrade, PolicyBazaar, Paytm, etc. along with other 30+ start-ups were listed on the public stock exchanges (BSE & NSE) in India. While more than half of these IPOs did well only on the very first listing day, others (like Paytm) have gone into negative or remained flat.
Now, the question that generally arises in the mind of young entrepreneurs will be how to list their start-ups in SME exchanges such as NSE EMERGE or BSE SME exchange. In this article, we will discuss the eligibility criteria, process, and benefits of listing your start-up on a recognized SME.
SME Exchanges in India
SMEs are commonly known as the “Backbone of the Indian economy which supports employment to around 70 million people through 30 million enterprises but is still far-fetched from getting opportunities to grow in the absence of funding & investments. Therefore, to facilitate the listing of shares for small and medium-sized companies with higher growth potential, SEBI announced the establishment of an SME exchange as defined under Chapter XB of the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations in 2012.
Presently, there are two primary two SME Exchanges in India i.e. BSE SME platform (BSE) & NSE EMERGE Platform. NSE EMERGE platform is an SME stock exchange that allows startups and SMEs to list either with or without an initial public offering (IPO) helping SMEs to get access to a pool of investors & raise equity funding. Similarly, BSE SME Exchange allows a platform to raise capital for growth & expansion.
Eligibility Criteria for Listing on SME Exchange
| Conditions for Eligibility | |
| i. Nature of Applicant Entity | A Limited Company incorporated under the provisions of the Companies Act 1956 / 2013 in India. |
| ii. Post-paid-up capital | Shall not be more than Rs. 25 crores at face value. |
| iii. Record of continual profits | The start-up must have a recorded track of distributable profits for at least 2 years out of the immediately preceding three financial years.
Else, the net worth of the start-up must be at least Rs. 3 crores. |
| iv. Shareholding pattern | The shareholding pattern of the start-up company shall be either-
At least 10% of its pre-issue capital is to be held by Qualified Institutional Buyers as of the date of submission of the draft offer letter. OR At least 10% of its pre-issue capital should be held by a member of the angel investor network or Private Equity Firms( Such angel investor network/ private equity should have either invested in around 25 or more start-ups or their aggregate investment shall be above Rs.50 crores as of the date of filing of the draft offer letter. |
| v. Annual Revenue | The issuer start-up should have an annual income of at least Rs. 10 crores and should have shown annual growth of at least 20% in the past year.
Such annual growth could either be in the form of several users, revenue growth, or the customer base along with a positive net worth. |
| vi. Other Requirements:
|
· The issuer SME start-up shall have an official website.
· No changes/modifications in the promoter group should have taken place at least 1 year preceding the date of filing of the application to BSE for listing under SME exchange. |
Entities Not Eligible for Listing in SME Exchange
- If the start-up company or any of its promoters or promoter group has been debarred from accessing the capital market by the SEBI.
- Where either the start-up company or any of its directors/promoters have been declared a wilful defaulter.
- Where either the promoters or directors of the start-up company have been declared Fugitive offender.
- Where the issuer start-up has any outstanding convertible securities or any other right which would entitle any person with any option to receive equity shares of the issuer.
- Where the start-up company has been referred to the erstwhile Board for Industrial and Financial Reconstruction (BIFR).
- Where any court of competent jurisdiction has admitted any winding up application against the applicant Company.
- Where the applicant company has been subject to any material regulatory or disciplinary action by a stock exchange or regulatory authority in the past three years.
Benefits of Listing Start-ups on SME Exchange
Provided below are some of the key advantages of listing your start-up on SME exchange platforms –
Better Access to Equity Capital
Listing of start-ups on SME exchange will allow them access to better equity financing resources while reducing their dependency on debt funding and the debt burden on their balance sheets. Further, listing start-ups on SME exchange will bring opportunities for business growth not only through advanced business operations but also through expansions and business acquisitions.
Enhanced valuation of the business
Generally, various factors lead to an increase or decrease in the valuation of a start-up including the fact whether it is listed on the stock exchange or not. Thus, a listing of start-ups on an SME exchange allows better brand visibility and greater public awareness about the business and its offerings, thus providing the start-up with better visibility as well as credibility.
Risk Management for promoters
Getting the SME start-up listed on an SME exchange allows the start-up promoters to manage the allocation of risks effectively as listing allows the expansion of the investor’s base and presence of start-ups in the secondary market for equity financing.
Improved Participation from PE Investors
Since the listing of the start-up ensures greater brand visibility, better reach, and flexibility for the investors to make any strategic exit, start-ups/SMEs benefit from the increased participation of investors in the business through a transparent trading platform. Listing of start-ups on SME exchange also benefits VCs by offering them a pre-defined and transparent tax-effective exit route.
Building a Brand for the Start-up
Among other benefits, start-ups listed on a stock exchange also enjoy benefits such as enhanced brand image, higher credibility, and strong national as well as global recognition. Further, through the listing, start-ups can access more public awareness through media coverage and research undertaken by sector investment analysts, etc. thus helping start-ups to build and establish their brand from scratch which is a key goal for most of the start-ups.
Process of Listing start-ups on SME Exchange
Step 1. Appointment of a Merchant Banker
The process of listing your start-up on an SME exchange (NSE EMERGE/BSE SME) starts with the appointment of a merchant banker, a professional who will help your start-up to manage the end-to-end process of listing your start-up. Every issuer SME start-up shall appoint a merchant banker and obtain his consultancy to manage the end-to-end process of listing.
Step 2. Due Diligence and Documentation
Once the merchant banker is appointed by the start-up, he will initiate the process of listing by conducting due diligence on the start-up enterprise which includes a thorough investigation of all crucial documents like financial statements, material contracts, promoter details, regulatory approvals, compliances, etc. and based on which he will prepare a due diligence report to be submitted to the stock exchanges of India. Additionally, he will also start preparing additional documents which shall be required to be submitted for a listing of the start-up i.e. IPO structure& other financial requirements)
Step 3. Filling Draft Prospectus
Once the documents are ready, the merchant banker will also prepare a draft offer letter or prospectus for the issue of shares following all the governing rules & regulations and govt. notification related to the issue of the prospectus at the time of the issue.
Step 4. Submitting Application
Once the process of due diligence and documentation is finished, the merchant banker shall submit the draft prospectus along with the application seeking permission to list securities on the SME exchange with an explanation for its intention behind the same.
On receipt of the application along with the draft prospectus, the stock exchange will undergo the application to verify the genuineness of the application. It will also conduct an inspection of the business site after which the promoters of the start-up may be called for an interview with the Listing Advisory Committee. Once the SME exchange is assured that all listing compliances have been fulfilled and the listing advisory committee has given a recommendation for the same, it will issue an in-principle approval to the SME start-up.
Step 5. Obtaining approval of ROC
Next, the merchant banker shall submit a copy of the draft offer document to the concerned Registrar of Companies specifying the opening and closing date of the issue and further seeking approval for the same. Once the ROC gives his approval, the issuer SME start-up shall notify the stock exchange with all the details regarding the issue along with the prescribed documents.
Step 6. IPO & Listing on SME exchange
The Initial Public offer of the start-up company will open and close as per the timeline prescribed in the draft prospectus. On the closure of the issue, the issuer start-up will submit the final documents to the stock exchange and at the same time issue a notice informing about the listing & trading of the securities of the start-up to the public in general.
Documents Required for Listing on SME Exchange
- Ten copies of the draft issue offer document.
- Copy of draft prospectus to be published.
- Copy of resolution passed by the Board of Directors of the start-up company for a listing of start-ups on SME exchange.
- Copy of the special resolution passed by the shareholders of the start-up company.
- A Certificate from the Managing Director / Company Secretary or PCS / Statutory or Independent Auditors stating that –
- The start-up company has not been referred to the Board for Industrial and Financial Reconstruction (BIFR).
- Neither any court of competent jurisdiction has admitted the winding up petition against the company nor has any liquidator been appointed.
- No changes in the existing promoter/s of the company in the preceding year from the date of filing an application to NSE/ BSE for listing on the SME segment have been made.
- Copy of all show-cause notice(s)/order(s) issued by any regulatory authority such as RBI, SEBI, ROC, Stock Exchanges of India, etc.
- Copy of PAN of the start-up company.
- DIN & PAN details of the promoters and directors of the start-up company.
- Copy of financial statements of the start-up company for the preceding 5 years (or for such applicable periods)
- Copies of agreements entered between the start-up company & its promoters/ directors.
- Articles & Memorandum of Association of the Company.
- Certificate of compliance from the statutory auditor/practicing chartered accountant certifying compliance with conditions of Corporate Governance as stipulated by SEBI through clause 52 of the listing agreement.
The Final words..
Therefore, start-ups in India have played a crucial role in nation-building due to their potential in terms of generating employment and income as well as fostering innovation and enterprise. Listing SMEs on SME exchange could bring a whole lot of benefits such as better credibility & visibility, growth & expansion opportunities, and access to equity financing opportunities.
However, the process of listing their shares on an SME exchange could be extremely complicated and time-consuming in absence of proper guidance & knowledge. But, once you have taken care of all of the above-said points, the process of listing could become easier and more efficient. Also, it is necessary to ensure that before your start-up organization starts the process of listing, it is critical to ensure that your firm is functioning smoothly and at a lower cost. Keeping things in control will help your start-up reach profitability quickly enough to go public successfully.
