What does the relaxation of guidelines of SME listing for tech startups mean?

By Lalit Kumar|30th Jun 2018
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Gone are those days when a tech startup is left wondering how to tap equity market to raise funds because of stringent conditions for listing, one being profitability. As many of us know, early-stage tech startups take time to generate revenues. In the world of the number of clicks and subscribers, being profitable is the last criterion which is focussed on. Likewise, there is a good amount of R&D which gets to stack up a tech product. Hence higher cash burn will always be the need of the hour.

The Bombay Stock Exchange has indeed understood the pain points of the startup environment and thereby has come up with separate criteria for them to be eligible to list. Not to forget, the BSE’s SME segment has emerged as the preferred platform for SMEs in India with the highest number of listed companies. It has also proved to be a vital cog to the Indian economy by enabling 254 companies with a total market cap of Rs 20,583 crores to list themselves. A whopping Rs 2,406 crores have been raised so far from the Indian public. It is noteworthy that 50 of these companies have shifted to the main board.

Earlier, the platform had these benchmarks to be adhered to in order for a company to be eligible to list itself on it.

Financial conditions:

  • The post-issue paid up capital of the company had to be at least Rs 3 crores.
  • The net worth of the company (excluding revaluation reserves) has to be at least Rs 3 crores as per the latest audited financial results.
  • Net tangible assets of at least Rs 3 crores, as per latest audited financial statements, has to be maintained.

Track record:

Distributable profits in terms of Section 123 of the Companies Act 2013 for at least two years out of immediately preceding three financial years (each financial year has to be a period of at least 12 months), or the net worth shall be at least Rs 5 crores.

*Extraordinary income will not be considered for the purpose of calculating distributable profits.

Now for mainstream companies, this was an appropriate, precise benchmark. But in the case of startups in our country, the numbers speak louder than words. As per a study conducted by IBM in collaboration with Oxford, 90 percent of startups fail within the first five years of their incorporation, while a minuscule percentage of these actually make some profits. If these startups are not supported by adequate funding at the right time, an out-of-the-box idea might die outright.

To enable these startups to breathe easier, BSE-SME has come up with new guidelines for listing of certain classes of startups on its platform.

To provide further incentive to the companies which are startups in the sector of IT, ITES, biotechnology, life sciences, etc., the Exchange has announced that the “BSE Startup Platform” is enabled on the BSE-SME segment, effect from July 9.

This platform will facilitate the listing of companies in the sectors of IT, ITES, biotechnology and life sciences, 3D printing, space technology, e-commerce, hi-tech defense, drones, nanotechnologies, Artificial Intelligence, Big Data, Enhanced/Virtual Reality, e-gaming, exoskeleton, robotics, holographic technology, genetic engineering, variable computers inside body computer technology, and any other hi-tech based company.

The criteria for listing on the “BSE Startup Platform” is now as follows:

  • The pre-issue paid up equity share capital of the company should be minimum of Rs 1 crore (as against 3 crores post-issue in existing).
  • The company should be in existence for a minimum period of three years on the date of filing the draft prospectus with BSE.
  • There should preferably have been an investment by QIB investors (as defined under SEBI ICDR Regulations, 2009)/angel investors for a minimum period of two years at the time of filing of draft prospectus with BSE, and such aggregate investment should be at least Rs 1 crore.
  • The company should have positive net-worth (as against 3 crores net worth in existing)
  • The company should not have been referred to the National Company Law Tribunal (NCLT) under the Insolvency and Bankruptcy Code, 2016.
  • There should be no winding up petition against the company that has been accepted by the National Company Law Tribunal (NCLT).

The companies listing on the BSE Startup Platform with the above-mentioned criteria should follow all the other conditions applicable for the listing of SME companies under Chapter XB of “SEBI (ICDR) Regulations, 2009”, relating to disclosures, migration to the main board, etc.

Earlier in 2013, NSE had also launched the Emerge Institutional Trading Platform (ITP) which was a dedicated platform for startups to list with or without an Initial Public Offering (IPO), which failed to take off as only 11 startups signed up for the platform since its launch because of unfriendly selection criteria.

Lalit Kumar is Vice President at MCA Management Consultants Pvt Ltd where he heads the consulting wing.

(Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the views of YourStory.)

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