How BSE SME helped small Indian businesses raise Rs 3.2k Cr equity capital
Even prior to the COVID-19 pandemic, MSMEs in India had limited access to formal sources of finance. D&B India research suggests that only four percent of Indian MSMEs have access to a formal source of finance, such as a commercial or a development bank. When the pandemic hit the Indian economy, it exacerbated the cash crunch faced by MSMEs.
Challenges with liquidity have played a major role in hindering the growth of MSMEs. Since 2012, Asia’s oldest stock exchange BSE (formerly known as Bombay Stock Exchange) has been making strides in ensuring public equity for SMEs by getting them listed on its BSE SME platform.
Ajay Thakur, Head - BSE SME and Startup, BSE
“The BSE SME platform was launched to provide opportunities to SMEs to raise equity capital for their growth and expansion in a cost-effective manner. It helps unleash the valuation of the company, and in the process, create wealth for all stakeholders, including investors, and provides the facility to exit at any time. It also provides an immense opportunity to investors to identify and invest in good companies at an early stage,” says Ajay Thakur, Head - BSE SME and Startup, BSE.
BSE was the first exchange to launch an SME platform, and till date, has listed 323 SMEs on it, out of which 82 have migrated to the main BSE board, it claims on its website. A total of over Rs 3,278 crore has been raised on the exchange.
In an exclusive interview with SMBStory, Ajay explains how BSE SME works and how small-to-medium Indian businesses can avail public equity by listing on the platform.
Edited excerpts from the interview:
SMBStory [SMBS]: Why was there a need to create something like BSE SME?
Ajay Thakur [AJ]: The contribution of MSMEs in the development of the Indian economy has been significant, both in terms of contribution to the GDP and the creation of employment opportunities. They are the largest generator of employment, accounting for 80 million-plus jobs. In India, it's the second-largest employer, after agriculture.
Thus, the creation and conservation of MSMEs are inevitable. With the Indian economy growing, the need for SMEs to raise capital is becoming increasingly critical. A specialised capital market segment was needed that could provide risk capital to promising entrepreneurs, promoting innovation crucial for sustainable economic growth.
The PM task force, based on the feedback and representation of various industrial associations, recommended the formation of an exclusive SME exchange/platform to help SMEs to access the capital market to raise equity funds. Once SEBI came in with the guidelines on the SME platform, BSE felt the need to provide the platform. This was how BSE SME platform came into existence on March 13, 2012.
SMBS: How does BSE SME work and what is the process for listing on it?
AJ: The SMEs which desire to get listed have to approach the merchant banker registered with SEBI and understand the cost, timeline, processes, documentation, and the quantum of funds that can be raised. Once they are satisfied with the merchant banker and have decided to go for listing, the director/partner/proprietor has to sign the mandate.
The merchant banker completes all the documentation as per SEBI ICDR guidelines after due verification. The complete prospectus, which is called DRHP (Draft Red Herring Prospectus), is submitted to the exchange along with the supporting documents.
BSE does the vetting of the documents to ensure that it is complete in all aspects, does the site visit of the company, and also does the interview of the promoter. Once BSE is satisfied with the representation of the merchant baker and the promoter, BSE gives in-principle approval.
Pursuant to this, if there is any correction or amendment in the DRHP, it is incorporated by the merchant banker. The final prospectus, which is called RHP (Red Herring Prospectus), is filed with ROC (Registrar of Companies) of the respective jurisdiction for its approval.
Once approval is in place, the company opens the issue, which remains open for the period mentioned in the prospectus. After the issue gets fully subscribed in the allotted time, it gets closed. After the closure of the issue, the merchant banker has to complete the formalities within six days, and on the sixth day of the closure, the company gets listed on the stock exchange and trading starts.
SMBS: What are the things SMEs need to keep in mind while listing on BSE SME?
AJ: The SMEs desirous of getting listed on BSE SME have to ensure that all the regulatory compliances have been done and that all the approvals for running the business are in place. Also, the last three years’ audited results should be in place.
The SMEs should then start meeting the merchant banker to understand the market dynamics, and also start meeting potential investors. Along with a long term business plan, they should plan the formation of the board and committees.
SMBS: What are the advantages of listing on this exchange? Why should SMEs come here?
AJ: BSE SME provides SMEs with equity financing opportunities to grow their business – from expansion to acquisition. Next, equity financing can lower the debt burden, leading to lower financing cost and healthier balance sheet.
It also expands the investors base, which, in turn, helps in getting secondary equity financing, including private placement. Further, the listing enhances the company’s visibility. Media coverage provides SMEs with greater profiles and credibility, leading to an increase in the value of its shares.
The company’s credibility also goes up due to better corporate governance and transparency because of listing. The company’s employees also have a greater incentive to participate in the ownership of the company through ESOPs and benefit from being its shareholders.
SMBS: What are the challenges in working with SMEs to list on BSE SME?
AJ: The major challenge is the lack of awareness and understanding of the capital market. The fear of an increase in regulatory compliances also restrains the promoters from accessing the equity market.
Promoters don’t easily want to part with their equity to an outsider, with the fear of takeover and interference. We are running a lot of awareness programmes to make the promoters understand the benefits of listing, and also to remove these unfounded fears.
SMBS: How has COVID-19 impacted the market and what is its impact on BSE SME?
AJ: There has been a negative impact because of the lockdown and declaration of containment zones in various places such as industrial zones. Business houses, especially MSMEs, were severely impacted as supply and demand got disrupted.
We have seen a slowdown in the last three months, though four SMEs and one startup which got listed have raised almost Rs 16 crore from the market over the same period. We are of the view that this year, we may see fewer listings in comparison to prior years.
However, we still expect around 100 SMEs to get listed in two years. We are aggressively doing webinars with various industrial and professional associations to reach various SMEs and startups and educate them on the advantages of listing on BSE SME.