Future Financing for company

Getting listed with SME Platforms will provide the SME’s with equity financing opportunities to grow their business. The option of equity financing through equity market allows the company to raise long-term capital and also get further credits from banks or other financial institutions on the basis of additional equity infusion. The issuance of public shares expands the investor base, and this in turn will help set the stage for secondary equity financings, including private placements. 

In addition, companies often receive more favourable lending terms when borrowing from financial institutions. Moreover, equity financing lowers the debt burden leading to lower financing costs and healthier balance sheets for the firms. 

The continuing requirement for adhering to the stock market rules for the issuers lowers the on-going information and monitoring costs for the banks. Equity financing also lowers the debt burden leading to lower financing costs and healthier balance sheets for the firms.

Increased visibility and prestige

Going public is likely to enhance the company’s visibility. Greater public awareness gained through media coverage, publicly filed documents and coverage of stock by sector investment analysts can provide the SME with greater profile and credibility. This can result in a more diversified group of investors, which may increase the demand for that company’s shares leading to an increase in the company’s value.

Venture Capital (VC)

It has been seen that there is greater vitality of venture capital in stock market centered systems. The underdeveloped equity culture has made it difficult for companies to get into the VC phase as well as graduate from venture capital/ startups phase to a scale of operations that would make them internationally competitive. A vibrant equity market would prove to be an added incentive for greater venture capital participation by providing an exit option, leading to a reduction in their lock-in period.

Liquidity for shareholders

Becoming a public company establishes a market for the company’s shares, providing its investors with an efficient and regulated vehicle in which to trade their own shares. Greater liquidity in the public market can lead to better valuation for shares than would be seen through private transactions.

Create employee incentive mechanisms

The employees of the SME enterprises can participate in the ownership of their own company and benefit from being a shareholder. This can serve to ensure stronger employee commitment to the company’s performance and success. 

Facilitate growth through Mergers and Acquisitions

As a public company, company’s shares can be utilized as an acquisition currency to acquire target companies, instead of a direct cash offering. Using shares for an acquisition can be a tax efficient and cost effective vehicle to finance such a transaction.

Encourages Innovation & Entrepreneurial Spirit

The ability of companies in their early stages of development to raise funds in the capital markets allows these companies to grow very quickly. This growth helps speed up the dissemination of new technologies throughout the economy. In addition, by raising the returns available from pursuing new ideas, technologies, etc. the capital markets facilitate entrepreneurial activities.

Efficient Risk Distribution

The capital markets have given an opportunity to the SMEs to distribute their risk more efficiently by transferring it to the group or investors who are willing to bear it. Thus the capital markets ensure that capital flows to its best uses.

Migration to Main Board

All Companies listed on SME Exchange can migrate to the Main Board of BSE at any point of time, provided that the shareholders approval is accorded.

Tax Benefits

Only a Public Limited Company can be listed so if you are a Private Limited Company, Proprietary Firm or a Partnership Firm, first of all, conversion to Public Limited Company is required. Both BSE SME Exchange and EMERGE NSE Exchange have their own eligibility criteria for SME Listing, in addition to SEBI norms for listing.

THE ELIGIBILITY CRITERIA OF BSE SME (SME PLATFORM) OF BOMBAY STOCK EXCHANGE :  

ELIGIBILITY CRITERIA OF EMERGE (SME PLATFORM) OF NATIONAL STOCK EXCHANGE : 

The following criteria should be complied with on the date of filing the Draft Red-Herring Prospectus (DRHP) with NSE as well as when the RHP is filed with ROC and SEBI. 

LISTING GUIDELINES AND NORMS BY SEBI

To facilitate SME listing, SEBI has made significant amendments in the SEBI (Issue of Capital and Disclosures Requirements) by inserting Chapter X for the issue of specified securities by small and medium enterprises. Important provisions are reproduced hereunder:

CHAPTER XB – ISSUE OF SPECIFIED SECURITIES BY SMALL AND MEDIUM ENTERPRISES of SEBI

(Issue of Capital and Disclosures Requirements)

[106M.] 

1. An issuer whose post-issue face value capital does not exceed ten crore rupees shall issue its specified securities in accordance with provisions of this Chapter.
2. An issuer, whose post issue face value capital is more than ten crore rupees and upto twenty five crore rupees, may also issue specified securitiesin accordance with provisions of this Chapter.
3. The provisions of these regulations, in respect of the matters not specifically dealt or excluded under this Chapter, shall mutatis mutandis apply to any issue of specified securities under this Chapter: 

Provided that provisions of sub-regulations (1), (2) and (3) of regulation 6, regulation 7, regulation 8, regulation 9, regulation 10, regulation 25, regulation 26, regulation 27 and sub-regulation (1) of regulation 49 of these regulations shall not apply to an issue of specified securities made under this Chapter.

[106N.] 

1. In this Chapter, unless the context otherwise requires, – 
   1. “Main Board” means a recognized stock exchange having nationwide trading terminals, other than SME exchange;
   2. “nominated investor” means a qualified institutional buyer or private equity fund, who enters into an agreement with the merchant banker to subscribe to the issue in case of under-subscription or to receive or deliver the specified securities in the market-making process;
      
      Explanation: “private equity fund” means a fund registered with any regulatory  authority or a fund established by any person registered with any regulatory authority;
   3. “SME exchange” means a trading platform of a recognised stock exchange having nationwide trading terminals permitted by the Board to list the specified securities issued in accordance with this Chapter  and includes a stock exchange granted recognition for this purpose but does not include the Main Board;
2. All other words and expression used in this Chapter but not  defined under sub-  regulation (1) shall derive their meaning from regulation 2 of these regulations.

Filing of offer document and due diligence certificate.[106O.] 

1. The issuer making a public issue or rights issue of specified securities under this Chapter shall not file the draft offer document with the Board:
   
   Provided that the issuer shall file a copy of the offer document with the Board through a merchant banker, simultaneously with the filing of the prospectus with the SME exchange and the Registrar of Companies or letter of offer with the SME Exchange:

Provided further that the Board shall not issue any observation on the offer document. 

1. The merchant banker shall submit a due-diligence certificate as per Form A of Schedule VI including additional confirmationsas provided in Form H of Schedule VI alongwith the offer document to the Board.
2. The offer document shall be displayed from the date of filing in terms of sub-regulation (1) on the websites of the Board, the issuer, the merchant banker and the SME exchange where the  specified securities offered through the offer document are proposed to be listed.

Underwriting by merchant bankers and underwriters.[106P.] 

1. The issue made under this Chapter shall be hundred per cent.- underwritten.
   
   Explanation: The underwriting under this regulation shall be for the entire hundred percent of the offer through offer document and shall not be restricted upto the minimum subscription level. 
2. The merchant banker/s shall underwrite at least fifteen per cent of the issue size on his/ their own account/s.
3. The issuer in consultation with merchant banker may appoint underwriters in accordance with Securities and Exchange Board of India (Underwriters) Regulations, 1993 and the merchant banker may enter into an agreement with nominated investor indicating therein the number of specified securities which they agree to subscribe at issue price in case of under-subscription.
4. If other underwriters fail to fulfill their underwriting obligations or other nominated investors fail to subscribe to unsubscribed portion, the merchant banker shall fulfill the underwriting obligations.
5. The underwriters other than the merchant banker and the nominated investors, who have entered into an agreement for subscribing to the issue in case of under-subscription, shall not subscribe to the issue made under this Chapter in any manner except for fulfilling their obligations under their respective agreements with the merchant banker in this regard.
6. All the underwriting and subscription arrangements made by the merchant banker shall be disclosed in the offer document.
7. The merchant banker shall file an undertaking to the Board that the issue has been hundred percent. underwritten along with the list of underwriters and nominated investors indicating the extent of underwriting or subscription commitment made by them, one day before the opening of issue.

Minimum Application Value.[106Q.]
The issuer shall stipulate in the offer document, the minimum application size in terms of number of specified securities which shall not be less than one lakh rupees per application.

Minimum Number of Allottees.[106R.]
No allotment shall be made pursuant to any initial public offer made under this Chapter, if the number of prospective allottees is less than fifty.

Listing of specified securities.[106S.] 

1. Specified securities issued in accordance with this Chapter shall be listed on SME Exchange.
2. Where any listed issuer issues specified securities in accordance with provisions of this Chapter it shall migrate the specified securities already listed on any recognized stock Exchange/s to the SME Exchange.

Migration to SME exchange.- [106T.]
A listed issuer whose post-issue face value capital is less than twenty five crore rupees  may migrate its specified securities to SME Exchange if its shareholders approve such migration by passing a special resolution through postal ballot to this effect and if such issuer fulfils the eligibility criteria for listing laid down by the SME Exchange: 

Provided that the special resolution shall be acted upon if and only if the votes cast by shareholders other than promoters in favour of the proposal amount to at least two times the number of votes cast by shareholders other than promoter shareholders against the proposal.

Migration to Main Board.[106U.] 

1. An issuwhose specified securitiesare listed on a SME Exchange and whose post issue face value capital is more than ten crore rupees and upto twenty five crore rupees, may migrate its specified securities to Main Board if its shareholders approve such migration by passing a special resolution through postal ballot to this effect and if such issuer fulfils the eligibility criteria for listing laid down by the Main Board:
   
   Provided that the special resolution shall be acted upon if and only if the votes cast by shareholders other than promoters in favour of the proposal amount to at least two times the number of votes cast by shareholders other than promoter shareholders against the proposal.
2. Where the post issue face value capital of an issuer listed on SME exchange is likely to increase beyond twenty five crore rupees by virtue of any further issue of capital by the issuer by way of rights issue, preferential issue, bonus issue, etc. the issuer shall migrate its specified securities listed on SME exchange to Main Board and seek listing ofspecified securities proposed to be issued on the Main Board subject to the fulfilment of the eligibility criteria for listing of specified securities laid down by the Main Board:
   
   Provided that no further issue of capital by the issuer shall be made unless – 
   1. the shareholders of the issuer have approved the migration by passing a special resolution through postal ballot wherein the votes cast by shareholders other than promoters in favour of the proposal amount toat least two times the number of votes cast by shareholders other than promoter shareholders against the proposal;
   2. the issuer has obtained in- principle approval from the Main Board for listing of its  entire specified securities on it. 

Market Making.[106V.] 

1. The Merchant Banker shall ensure compulsory Market Making through the stock brokers of SME Exchange in the manner specified by the Board for a minimum period of three years from the date of listing of specified securities issued under this Chapter on SME Exchange or from the date of migration from Main Board in terms of Regulation 129[106T], as the case may be.
2. The Merchant Banker may enter into agreement with nominated investors for receiving or delivering the specified securities in the Market Making subject to the prior approval by the SME Exchange where the specified securities are proposed to be listed. 
3. The issuer shall disclose the details of arrangement of Market Making in the offer document. 
4. The specified securities being bought or sold in the process of Market Making may be transferred to or from the nominated investor with whom the Merchant Banker has entered into an agreement for the Market Making:
   Provided that the inventory of the Market Maker, as on the date of allotment of the specified securities, shall be at least five per cent of the specified securities proposed to be listed on SME Exchange.
5. The Market Maker shall buy the entire shareholding of a shareholder of the issuer in one lot, where value of such shareholding is less than the minimum contract size allowed for trading on the SME Exchange:
   Provided that market maker shall not sell in lots less than the minimum contract size allowed for trading on the SME Exchange. 
6. Market Maker shall not buy the shares from the promoters or persons belonging to promoter group of the issuer, or any person who has acquired shares from such promoter, or person belonging to promoter group, during the compulsory Market Making period laid down under sub-regulation(1).
7. The promoters’ holding shall not be eligible for offering to the Market Maker under this Chapter during the period specified in sub-regulation (1):
   
   Provided that the promoters’ holding which is not locked-in as per these Regulations can be traded with prior permission of the SME Exchange, in the manner specified by the Board. 
8. Subject to the agreement between the issuer and the Merchant Banker/s, the Merchant Banker/s who has/have the responsibility of market making may be represented on the board of the issuer.]

Likewise, SEBI has amended the following Regulations in order to facilitate the SME IPO:

• SEBI (Merchant Bankers) Regulations, 1992;
• SEBI (Foreign Institutional Investors) Regulations, 1995;
• SEBI (Venture Capital Funds) Regulations, 1996;
• SEBI (Substantial Acquisition of Shares and Takeovers) Regulations; and
• SEBI (Stock Brokers and Sub-Brokers) Regulations, 1992

A. Listing with IPO

Corporates may raise capital in the primary market by way of an Initial Public Offer, rights issue or private placement. An Initial Public Offer (IPO) is the selling of securities to the public in the primary market. This Initial Public Offering can be made through the fixed price method, book building method or a combination of both.

Fixed Price method –

Book Building Method –

Book Building is essentially a process used by companies raising capital through Public Offerings – both Initial Public Offers (IPOs) and Follow-on Public Offers (FPOs) –  to aid price and demand discovery. It is a mechanism where, during the period for which the book for the offer is open, the bids are collected from investors at various prices which are within the price band specified by the issuer. The process is directed towards both the institutional as well as the retail investors. The issue price is determined after the bid closure based on the demand generated in the process. 

The Process :

• The Issuer who is planning an offer nominates the lead Merchant Banker(s) as ‘book runner(s)’.
• The Issuer specifies the number of securities to be issued and the price band for the bids.
• The Issuer also appoints syndicate members with whom orders are to be placed by the investors.
• The syndicate members input the orders into an ‘electronic book’. This process is called ‘bidding’ and is similar to open auction.
• The book normally remains open for a period of 5 days.
• Bids have to be entered within the specified price band.
• Bids can be revised by the bidders before the book closes.
• On the close of the book building period, the book runners evaluate the bids on the basis of the demand at various price levels.
• The book runners and the Issuer decide the final price at which the securities shall be issued.
• Generally, the number of shares is fixed. The issue size gets frozen based on the final price per share.
• Allocation of securities is made to the successful bidders. The rest get refund orders. 

Guidelines for Book Building – 

Rules governing Book Building Process are covered in Chapter XI of the Securities and Exchange Board of India ( Issue of Capital and Disclosure Requirements) Regulations, 2009. 

B. Listing without IPO

There were some bright changes in the capital market which were announced by the Finance Minister of India in Union Budget 2013 – 2014 on 20th February 2013 for Small and Medium Enterprises (SME) to help them grow big with liberalized policy.

Union Budget 2013-14 will allow the Small and Medium Enterprises (SME) to list on the SME Exchanges without even making an Initial Public Offering (IPO). Finance Minister, P. Chidambaram, announced that the norms enabling start-ups to list would be announced soon.

The benefits enjoyed by them will stay with them for up to three years after they grow out of the category in which they obtained the benefit. While only informed investors can subscribe to the SME issues, how the ‘informed investors’ are defined needs to be seen.

It will surely make a huge difference for the SMEs who have their informed investors, as the cost for coming up with IPO would not be there and more and more SMEs will be encouraged to get their companies listed on the SME platforms of BSE SME and NSE EMERGE.

Book Building is essentially a process used by companies raising capital through Public Offerings -both Initial Public Offers (IPOs) and Follow-on Public Offers (FPOs) – to aid price and demand discovery. It is a mechanism where, during the period for which the book for the offer is open, the bids are collected from investors at various prices which are within the price band specified by the issuer. The process is directed towards both the institutional, as well as the retail investors. The issue price is determined after the bid closure based on the demand generated in the process.

Book Building at BSE Platform

The Process

1. The Issuer who is planning an offer nominates the Lead Merchant Banker(s) as ‘book runner(s)’.
2. The Issuer specifies the number of securities to be issued and the price band for the bids.
3. The Issuer also appoints syndicate members with whom orders are to be placed by the investors.
4. The syndicate members input the orders into an ‘electronic book’. This process is called ‘bidding’ and is similar to open auction.
5. The book normally remains open for a period of 5 days.
6. Bids have to be entered within the specified price band.
7. Bids can be revised by the bidders before the book closes.
8. On the close of the book building period, the book runners evaluate the bids on the basis of the demand at various price levels.
9. The book runners and the Issuer decide the final price at which the securities shall be issued.
10. Generally, the number of shares is fixed. The issue size gets frozen based on the final price per share.
11. Allocation of securities is made to the successful bidders. The rest get refund orders.

Guidelines for Book Building

Rules governing Book Building Process are covered in Chapter XI of the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2009 

BSE’s Book Building System

1. BSE offers a book building platform through the Book Building software that runs on the BSE Private network.
2. This system is one of the largest electronic book building networks in the world, spanning over 350 Indian cities through over 7000 Trader Work Stations via leased lines, VSATs and Campus LANS.
3. The software is operated by book-runners of the issue and by the syndicate members, for electronically placing the bids on line real-time for the entire bidding period.
4. In order to provide transparency, the system provides visual graphs displaying price v/s quantity on the BSE website as well as all BSE terminals.

Book Building at NSE – EMERGE 

Like BSE, NSE also set up a nation-wide network for trading whereby members can trade remotely from their offices located all over the country. The NSE trading network spans various cities and towns across India.

NSE decided to offer this infrastructure for conducting online IPOs through the Book Building process. NSE operates a fully automated screen based bidding system called NEAT IPO that enables trading members to enter bids directly from their offices through a sophisticated telecommunication network. 

Book Building through the NSE system offers several advantages:

• The NSE system offers a nation wide bidding facility in securities.
• It provides a fair, efficient & transparent method for collecting bids using latest electronic trading systems.
• Costs involved in the issue are far less than those in a normal IPO. 

The IPO market timings are from 10.00 a.m. to 5.00 p.m. On the last day of the IPO, the session timings can be further extended on specific request by the Book Running Lead Manager.