Listing of SME’s on Stock Exchange
The BSE SME Exchange has been setup by the Bombay Stock Exchange to provide Small and Medium Sized Enterprises a platform for raising equity capital for their growth and expansion. SMEs are the backbone of a nation’s economy and Indian SMEs provide employment to 70 million people through 30 million enterprises. In 2010, The Prime Minister’s Task Force recommended the setting up of a dedicated Stock Exchange for SMEs and SEBI also laid down the regulations for the governance of a SME Exchange. Based on the above, the BSE SME Exchange was established to provide opportunity to Entrepreneurs to raise equity capital for the growth and expansion of SMEs. In this article, we look at how to list on the BSE SME Exchange with listing requirements.
BSE SME Exchange – Listing Requirements
The following are the listing requirements for the BSE SME Exchange:
1. The SME must be a Limited Company.
2. The issuer or SME must have a post-issue face value capital of Rs.1 crore to Rs.25 crores. Entities having a post-issue face value of over Rs.25 crores has to be necessarily listing on the Main Board of the BSE.
3. Net Tangible Assets of the SME must be atleast Rs.1 crore, as per latest audited financial results.
4. Net Worth (excluding revaluation reserve) must be atleast Rs.1 crore as per the latest audited financial statements.
5. The company must have a track record of distributable profits in terms of Section 205 of the Companies Act, 1956, for atleast two out of the immediately preceding three financial years. Otherwise, networth must be atleastRs. 3 crores.
6. The company must mandatorily facilitate trading in DEMAT securities and enter into agreement with both Depositories, namely, Central Depository Services Limited and National Securities Depository Limited.
7. The company must have a website.
8. The company should not have any reference before the Board for Industrial and Financial Reconstruction (BIFR).
9. The company should not have any winding up petition that has been accepted by a Court.
10. The issue must be a 100% underwritten issue. Merchant Banker must underwrite 15% on their own accounts.
11. The Merchant Banker to the issue is responsible for market making for a minimum of three years through a stock broker who is registered as market maker with the SME Exchange.
12. The company must have a minimum of 50 investors while listing through IPO.
Procedure for Listing on the BSE SME Exchange
Listing on the BSE SME Exchange involves five different steps, namely:
Step 1: Appointment of Merchant Banker
The issuer Company must consult and appoint a Merchant Banker in an advisory capacity for the listing on the BSE SME exchange.
Step 2: Due Diligence and Documentation
The Merchant Banker would then conduct a due diligence regarding the Company i.e checking the documentation including all the financial documents, material contracts, Government Approvals, Promoter details etc. and prepare documentation for the IPO. Planning and documentation by the Merchant Banker must include IPO structure, share issuances and financial requirements
Step 3: Application to BSE SME Exchange
Once the due-diligence and documentation is completed by the Merchant Banker, the draft prospectus and DRHP is submitted to the Exchange as per SEBI requirements.
After submission of the required application and documents to BSE, BSE verifies the documents and processes the same. A visit to the company’s site is also undertaken by the BSE Exchange Officials. Post site visit, the Promoters are called for an interview with the Listing Advisory Committee.
On satisfactory completion of the site visit and interview by BSE officials, BSE issues an in-principle approval on the recommendation of the Committee, provided all the requirements are compiled by the issuer Company. On obtaining in-principle approval, the Merchant Banker would file the Prospectus with the ROC indicating the opening and closing date of the issue. On obtaining approval from ROC, they intimate the Exchange regarding the opening dates of the issue along with the required documents.
Step 4: Initial Public Offering (IPO)
The Initial Public Offer (IPO) opens and closes as per schedule. After the closure of IPO, the company submits the documents as per the checklist to the BSE SME Exchange for finalization of the basis of allotment. On completion of the allotment, BSE issues the notice regarding listing and trading.
Trading on the BSE SME Exchange
After listing on the BSE SME exchange, existing members of the Exchange are eligible to participate in SME Platform and trade on the share of the SME. However, trading on the SME exchange is constrained by the following trading lot sizes:
a) The minimum application and trading lot size shall not be less than Rs. 1,00,000/-
b) The minimum depth shall be Rs 1,00,000/- and at any point of time it shall not be less than Rs 1,00,000/-
c) The investors holding with less than Rs 1,00,000/- shall be allowed to offer their holding to the Market Maker in one lot.
d) However in functionality the market lot will be subject to revival after a stipulated time.
Documents Required for Listing on the BSE SME Exchange
A. Along with the application for using the name of the Exchange in the offer document, the following documents/information shall to be filed by the Company with the Exchange:
1. 10 copies of the draft offer document.
2. Soft copy of the Prospectus for uploading on website
3. Copy of resolution passed by the Board of Directors for issue of securities
4. Copy of the shareholders resolution under 62(1)(c) of Companies Act, 2013
5. Certificate from the Managing Director / Company Secretary or PCS / Statutory or Independent Auditors stating the following:
a. The Company has not been referred to the Board for Industrial and Financial Reconstruction (BIFR).
b. There is no winding up petition against the company, which has been admitted by the court or a liquidator has not been appointed.
c. There has been no change in the promoter/s of the Company in the preceding one year from date of filing application to BSE for listing on SME segment.
6. Copy of all show cause notice(s)/order(s) issued by any regulatory authority (e.g. SEBI, ROC, RBI, CLB, Stock Exchange etc.) & Correspondence there to.
7. PAN & TAN of the Company.
8. DIN & PAN of Promoters and Directors.
9. Printed Balance Sheets, Profit & Loss Accounts and Cash Flow Statements for the preceding 5 years (or for such applicable periods)
10. Copies of major orders/contracts/ received/ executed/ in-hand should be kept ready and be available for inspection. A statement of material contracts duly certified by a practicing Chartered Accountant/ practicing Company Secretary should be submitted. The Company should also state the place, time and date where these documents can be inspected
11. A statement containing particulars of the dates of, and parties to all the material contracts, agreements (including agreement for technical advice and collaboration), concessions and similar other documents (except those entered into in the ordinary course of business carried on or intended to be carried on by the company) together with a brief description of the terms, subject matter and general nature of the documents.
12. Details if the present or any previous application of the Company/Group Company for listing of any securities has been rejected earlier by SEBI or by any stock exchange and reasons thereof.
13. Name of the exchange which is proposed to be designated Exchange for the issue, if decided.
14. Copies of agreements and memoranda of understanding between the Company and its promoters/ directors.
15. Articles & Memorandum of Association of the Company.
16. A certificate from the statutory auditor/practicing chartered accountant certifying compliance of conditions of Corporate Governance as stipulated in clause 52 of the listing agreement and circular no.SEBI/CFD/DIL/CG/1/2004/12/10 dated October 29, 2004 issued by the Securities and Exchange Board of India (SEBI). The company should also give the composition of various committees as required under the said clause.
17. Association, if any, of the directors/ promoters of the Company with any public or rights issue made during the preceding 10 years.
18. One Time Listing Fees of Rs. 50,000/- plus applicable Service Tax.(Details of all applicable fees for SME Listing is attached)
19. Date of opening of public issue to be intimated as soon as it is finalized.
SEBI ICDR not to govern listing of SME
SEBI (Issue of Capital and Disclosure Requirement) Regulations, 2009 (SEBI ICDR Regulations)
SEBI ICDR Regulations deal with issue of specified securities through initial public offering by a new issuer or through a further offering by a listed issuer. SEBI ICDR Regulations contain various chapters dealing inter alia with the following :-
a. Public Issue
b. Rights Issue
c. Preferential Issue
d. Qualified Institution Placement (QIP)
e. Bonus Issue
f. Issues by SMEs
g. IDR Issues
h. General Obligation of Issuer and Merchant Banker in Public Issue/ Right Issue
However, the following issues have been left out of the purview of ICDR, which are regulated by other regulations as mentioned : -
a. Public Issue of Debt Securities (Regulated by SEBI (Issue and Listing of Debt Securities) Regulations 2008)
b. Issue of ADR/ GDR (Regulated by Government's Issue of FCCBs and Ordinary Shares (Through Depository Receipt Mechanism) Scheme, 1993)
c. Issue of FCCBs (Regulated by Government's Issue of FCCBs and Ordinary Shares (Through Depository Receipt Mechanism) Scheme, 1993)
d. Issue of Shares pursuant to ESOPs (Regulated by SEBI (Employees Stock Option Plan and Employees Stock Purchase Scheme) Guidelines, 1999)
SEBI ICDR Regulations as Applicable to SMEs
With a view to facilitate the necessary provisions needed for SME Exchange, amendments have been made to the SEBI ICDR Regulations and a separate Chapter X-A has also been inserted therein. The regulations emphasized on the following:
Reduced paid up Capital threshold: An issuer company whose post-issue paid-up capital is not more than INR 10 Crore shall be eligible to list its securities on the SME exchange. Those issuer companies, whose post-issue paid-up capital lies between INR 10 Crore and up to INR 25 Crore, have the option to list their securities either under the provisions of this Chapter XB, i.e. on SME Exchange or on Main Board by complying with the relevant terms and conditions prescribed under the SEBI ICDR Regulations. As per the provisions of the SEBI ICDR Regulations, a minimum paid up capital of INR 10 Crore is required for listing of securities on any Main Board of BSE / NSE.
Filing of the offer document : The offer document is required to be submitted to the merchant banker who, in turn, will file it with SEBI along with the new Form H. A prospectus in relation to the issue shall also be filed with the SME Exchange and the jurisdictional Registrar of Companies. It has been specifically mentioned that SEBI will not scrutinize the offer document of an SME IPO.
Underwriting : Underwriters to the issue under Chapter XA shall ensure that the issue is 100% underwritten and that a disclosure to that effect is made to SEBI, a day prior to the opening of the issue. A minimum of 15% of the issue size is mandated to be underwritten by the merchant bankers. Certain Nominated Investors may be permitted to enter into contractual arrangements with the merchant bankers to share the burden of devolvement of underwriting obligations; however such contractual arrangements shall be subject to the prior approval of the SME Exchange. In case the underwriters or the Nominated Investors fail to achieve the minimum subscription, the merchant banker shall be required to fulfill its underwriting obligations.
Minimum Application Size and Number of Investors : Minimum application size in an SME IPO is fixed at INR 100,000 per application as opposed to the minimum application value ranging from INR 10,000 to INR 15,000 per application under Main Board IPO. Further, the minimum number of allotees in an SME IPO should be at least 50.
Migration to SME Exchange : A listed issuer whose post-issue paid-up capital is less than INR 25 Crore has an option to migrate to the SME Exchange, subject to the approval of its shareholders and compliance with the eligibility criteria laid down by the SME Exchange.
Migration from SME Exchange : Companies listed on the SME Exchange shall compulsorily migrate to the Main Board of the Stock Exchanges if their post-issue share capital is in excess of INR 25 Crore. Upon the performance of any rights issue/ preferential issue/ bonus issue which results in triggering of the above limit, then such company would have to compulsorily migrate to the Main Board. Such companies shall, therefore, be required to comply with the provisions of the Listing Agreement of the Main Board and all regulatory requirements including compliance with SEBI ICDR Regulations for the purposes of the same.
Market-making : The merchant banker to the issue shall bear the responsibility of compulsory market making for a minimum period of 3 years. The securities being bought and sold as part of the market making shall ultimately get transferred to the Nominated Investor. During the compulsory market-making period, the market makers are restricted from buying any securities from the promoters/ promoter group of the issuer or any other acquirer. The promoters may, therefore, be allowed to dilute their shareholding either through offer for sale or to an acquirer. However, the promoters' shareholding which is not locked-in may be traded with the prior permission of the SME Exchange. In case, the value of the shareholding of the Nominated Investors falls below INR 1 lakh, for any reason whatsoever, the market maker is obligated to buy the entire shareholding of such investor in a single lot. Acquisitions of shares by the merchant bankers / market makers are exempted from the SEBI Takeover Code, provided that such merchant bankers/ market makers do not have the intention of taking over the management and there is no resultant change in control (direct or indirect) of the issuer company.
Market Makers Obligation
SEBI has compulsorily mandated market making for all scripts listed and traded on the SME exchange. The obligations of market makers are as follows:
1. The merchant bankers to the issue will undertake market making through a stock broker who is registered as market maker with the SME exchange.
2. The merchant bankers shall be responsible for market making for a minimum period of 3 years.
3. The market makers are required to provide two way quotes for 75% of the time in a day. The same shall be monitored by the exchange.
4. There will not be more than 5 market makers for scrip.
5. Market makers will compete with other market makers for better price discovery.
6. The exchange shall prescribe the minimum spread between the bid and ask price.
7. Market Maker shall be allowed to deregister by giving one month notice to the exchange.
8. Trading system may be either quote driven or hybrid.
SME Listing Agreement
SEBI in order to encourage promotion of dedicated exchanges and/or dedicated platforms of the exchange for listing and trading of securities issued by Small and Medium Enterprises ("SME"), and in order to facilitate listing of specified securities in the SME Exchange, has facilitated a separate Model Listing Agreement" to be executed between the issuer and the stock exchange.
SME listing agreement is similar to the Main Board equity listing agreement. However, certain relaxations are provided to the issuers whose securities are listed on SME Exchange in comparison to the listing requirements in Main Board, which inter-alia include the following:
1. Companies listed on the SME Exchange may send their shareholders, a statement containing the salient features of all the documents (in abridged form), as prescribed in proviso to section 136 of the Companies Act, 2013 instead of sending a full annual report.
2. Periodical financial results may be submitted on "half yearly basis", instead of "quarterly basis" under Clause 41 and
3. SMEs need not publish their financial results in newspapers, as required in the Main Board equity listing agreement.