Let’s go back a decade. Second, India already had a vibrant stock market with many well-known business families and conglomerates having listed their companies on the stock exchange. But a missing link was a dedicated platform for small and medium-sized enterprises (SMEs), often seen as the backbone of any economy. For context, government data shows that there are almost 9.8 million micro, small and medium enterprises or MSMEs registered in the country.
Such a platform has always been on the minds of market participants – something like the Alternative Investment Market or the London Stock Exchange’s AIM platform – where these companies could benefit from a set of listing rules flexible, which would prepare them to migrate to the main exchange after a few years.
Eventually, such a segment was launched – both on the BSE and the National Stock Exchange (NSE) – in March 2012. Shortly after, the first SME was listed. If the numbers are anything to go by, the segment has seen steady growth since its inception. That’s commendable, given that its revenue pales in comparison to benchmarks. For example, on the BSE SME, the average daily deal turnover in July is pegged at Rs 18.5 crore with the cumulative turnover at almost Rs 315 crore; on BSE, the comparable figures are Rs 3,211 crore and Rs 54,588 crore respectively. The segment has also helped companies grow and scale up by providing them with the benefits of listing, such as increased visibility, better access to funding, and better compliance and process, as well as the respect an entity enjoys. listed.
THE ADVANTAGES OF REGISTRATION
Brothers Rahul and Varun Batra are directors of Beta Drugs, an SME listed on NSE Emerge. It was a business like any other family business, and it was doing pretty well before it went public. But listing changed the business for good. “The best thing to come with listing is the level of professionalism in our business,” says Rahul Batra. “When we decided to go public, we hired a professional financial manager who helped us save a lot on interest charges. We have experts in HR, sales, data management and almost everything. Once you’re listed in the market, you have to deliver good results and that pressure has helped us perform better. If we hadn’t been listed, we wouldn’t have brought that kind of professionalism,” he adds.
One of the reasons for the improved professionalism is that listing brings with it institutional investors, as the SME field has been attracted to them.
“The SME segment has grown significantly year on year, particularly during the pre-Covid-19 period. Many of our IPOs have seen the participation of mutual funds, alternative investment funds and ultra HNI,” says Mahavir Lunawat, founder of Pantomath Capital, an investment bank that has managed more than 100 SME issues.
He adds that the issues have provided exits for PE/VC funds, while there have been instances of acquisitions, new fundraising and significant post-listing expansions in several cases. “This segment has become a real alternative for start-ups to raise growth capital without the burden of interest,” he says.
THE NUMBERS GAME
When the segment launched, each of the two exchanges wanted to achieve supremacy by enticing more companies to list on their respective platform. The BSE took the lead in the first four years, with nearly 120 SMEs referenced on its platform compared to 11 on NSE Emerge; NSE said it focused on quality, not quantity. While the BSE has maintained its lead for most of the years since its launch, the NSE managed to overtake it in 2017 and 2018, securing a total of 159 SMEs on its platform compared to 118 for the BSE.
Until June 2022, a total of 383 SMEs had entered the capital markets by listing on BSE SME, while NSE Emerge had 257 listings. And in terms of the number of companies migrating from the SME segment to the main board, the BSE leads with 147 entities against 109 for the NSE.
Ajay Kumar Thakur, Head of BSE SME & Start-up, BSE, attributes the trend to the exchange’s outreach efforts with market regulator Sebi, state governments, investment bankers and industry associations. “We have companies listed in 20 states… This will help them get equity, create visibility and transparency, and unlock their value,” he says, adding that growing the sector will create jobs. .
In the current calendar year to June, up to 45 SMEs have launched IPOs – nearly three times the number of issues on the main board – to be listed, with the cumulative size of public issues being pegged at nearly Rs 800 crore. The first six months of CY22 have already seen the amount of funds raised exceed last year’s total of Rs 746 crore, according to data from Prime Database. The amount, however, is lower than that seen in 2018 when 141 SMEs entered the capital markets while raising a record Rs 2,287 crore.
The numbers may show that the SME segment is robust and growing, but it has had its own share of controversy.
In 2015, a few companies in the segment, along with their directors and promoters, were barred from the markets for allegedly using exchanges for money laundering, tax evasion and manipulation.
“The schemes, plan, device and artifice employed in this case, in addition to being a possible case of money laundering or tax evasion which could be viewed separately by the law enforcement authorities concerned, are prima facie also securities market fraud as to the extent that it involves manipulative securities trading and misuse of the securities market,” said an 80-page order issued by Sebi in June. 2015.
In total, nearly 240 entities were debarred from the securities market after the regulatory investigation. “It appears that the entities…have created demand for the stock offering from the Pre-IPO Pre-IPO assignees and provided them with a highly profitable exit at an unrealistic price achieved through price manipulation” , said Order Sebi, pointing to the fact that the unusual price increase took place without significant improvement in the financial situation of the companies.
Even today, the platforms are seeing a number of instances where stock prices are taking a huge spike, although market participants believe that wrongdoing in the SME segment is a thing of the past, with the current regulatory framework being much more evolved and strict than what he was using. be during the early days of the segment.
“Apart from a few stray cases, we haven’t encountered any such adverse cases. A more pertinent question, in my opinion, is how vulnerable companies are and whether they are sustainable. The quality of companies is a very critical barometer, especially considering that early stage investment is high risk and high return We need to think of a more robust mechanism to ensure that sustainable businesses are presented to the public to fight for growth next level,” says Lunawat.
As for those who have taken advantage of the platform diligently, the benefits are many. “The SME platform prepares you to migrate to the main board and since the regulatory framework for the SME segment is a little lenient compared to the main board, a company has two to three years to make the necessary changes and be ready to move to the main board. main board,” says Ashish Saraf, chairman of Manorama Industries, a Chhattisgarh-based SME that moved to the main board after being listed in the SME segment.
Respect and prestige definitely increase after migration, Saraf adds, pointing to the fact that he receives inquiries from many Chhattisgarh-based SMEs as they want to understand the experience and benefits of registration. Companies can migrate to the main board after remaining listed on SME platforms for at least three years, of which they must be profitable for at least two years.
Since listing has its advantages and many SMEs want to be listed, there is great potential for growth for both SMEs and the segment. With exchanges doing a lot in terms of awareness, the coming years should be interesting for the segment, provided good quality companies enter the arena and stock prices are influenced by fundamentals rather than entities with vested interests.