Bombay Stock Exchange Ltd.
Bombay Stock Exchange Limited
BSE SME Exchange
16th July, 2011
Soyal Gupta
BSE SME Exchange
Table of Contents (1/2)
Section
Contents
Page
A
Introduction
4
B
About SME Industry
11
C
Need for SME Exchange
14
D
SME Exchange - An Overview
18
E
About BSE SME Exchange
27
F
Key Players
35
2
Table of Contents (2/2)
Section
Contents
Page
G
Preparations for the IPO
37
H
Beneficial Aspects
42
I
Promoting the BSE SME Exchange
49
3
A.
Introduction
Vision and Mission
Vision
Wealth creation by the SMEs
through inclusive economic growth.
Mission
Provide the world class platform for the SMEs and Investors
to come together and raise the equity capital.
Message to the Entrepreneurs and Investors
“BSE SME Platform provides a great opportunity to the entrepreneurs to raise
the equity capital for the growth and expansion of SMEs. It also provides the
immense opportunity to the investors to identify and invest in the good
companies at early stage. It will help unleash the valuation of the company and
in the process create wealth for all the stakeholders including investors, besides
considerable long term capital gains tax benefits and facility to exit at any point
of time”
Introduction
 Capital Market Regulator SEBI has given ‘In Principle’ Approval to Bombay Stock
Exchange (BSE) Ltd. to launch the BSE SME Exchange/Platform .
 BSE is leveraging the existing ‘Equity platform’ i.e. BOLT System for launching the
BSE SME Exchange. Negligible cost in launching the platform.
 All Merchant Bankers empanelled with SEBI are by default MBs for this segment.
Additional responsibility of secondary market for market making.
 All Members registered with BSE are by default Members for this segment. No
additional infrastructure required by Members for secondary market trading.
7
Introduction
 SME companies with post issue paid up capital up to 25 crore can list on the BSE SME
Exchange.
 100% under writing by the Merchant bankers mean that the SME listing-cum-IPO
issue will be 100% success.
 Larger participation of investors – exit option
 Liquidity in the secondary market – Market Making
 Better opportunity for SMEs for equity fund raising.
8
How Different from Main Board (1/2)
 The new thing about the SME Exchange is that the issue will be 100%
underwritten and this means that the issue will be 100% success. Other new
aspect is that there will be support of three years in the secondary market
through market making activity.
 The SMEs with paid up capital up to Rs. 10 crores can come on the SME
Exchange, in contrast to the paid up capital of Rs. 10 crores or more for the main
board.
 The Listing norms have been simplified. The issuer has to take the approval of
the Exchange and SEBI approval is not required. A copy of the offer document
will be sent to the SEBI for their information.
9
How Different from Main Board (2/2)
 The Compliance norms are simplified. Half yearly compliance is required instead
of quarterly compliance.
 The abridged version of the annual reports need to be sent to the investors
instead of the entire annual report and posting the soft copy of the report on the
website is sufficient.
 The issue expenses will be minimal on the marketing and stationery. However, the
issue will be charged for underwriting, sub-underwriting and responsibility of
three years market making.
 Market Making is compulsory for 3 years, unlike on main platform.
10
B.
About SME Industry
About SME Industry
Classification of Micro, Small and Medium Enterprises
12
About SME Industry
 Micro, Small and Medium Enterprises (MSMEs) contribute
- 8% of the country's GDP
- 45% of the manufactured output
- 40% of our exports
 Provide employment to about 6 cr. people through 2.6 cr. enterprises.
 The Micro Small and Medium Enterprise (MSME) sector forms the largest
generator of employment in the Indian economy.
 The MSME sector forms a major portion of the industrial activity.
13
C.
Need for SME Exchange
Need for SME Exchange
 Provide the SMEs with equity financing opportunities to grow their business –
from expansion to acquisition
 Equity Financing will lower the Debt burden leading to lower financing cost and
healthier balance sheet
 Expand the investors base, which in turn will help in getting secondary equity
financing, including private placement
 Enhance company’s visibility. Media coverage can provide SME with greater
profile and credibility leading to increase in the value of its shares
 Incentives for greater venture capital participation by providing an exit option
thus reducing their lock-in period
15
Need for SME Exchange
 Greater incentive for the employees as they can participate in the ownership of
the company and benefit from being its shareholders
 Encourage innovation and entrepreneurial spirit
 Capital Market will help distribute risk more efficiently
 SME sector will grow better on two pillars of Financial system i.e. Banking and
Capital Market
Initiating a dedicated Stock Exchange for SMEs’ will lead to mobilization of the
diversified resources of finance and build a bridge between the SMEs, Private
Equity and the Venture Capital by providing an exit route.
16
Life Cycle of a Company
Expansion
Stage
IPO
Developing
Stage
Stable Profit
Margins
Growth
Stage
Nascent
Stage
PE Firms hold the
hands of SMEs
Supported by Venture
Capital Firms
High Risk & Lower Profit
Margins
Increase in Sales &
Rise in Profit
Profitability
Unlocking the Capital Market Opportunities
Decline due to
lack of funds
Profit Margin tends to rise
as the business expands
D.
SME Exchange - Overview
SME Exchange - Overview
 SEBI has issued a final circular on May 18, 2010 for setting up a stock exchange/
platform by a recognized Stock Exchange having nationwide trading terminal
 The necessary amendments have been made in the various SEBI Regulations
 Model equity listing agreement has been notified by SEBI on May 17th, 2010
 BSE is eligible for setting up SME exchange and already got the ‘In Principle’
approval from the capital market regulator ‘SEBI’ for launch of SME Exchange
19
SME Exchange – SEBI Guidelines
 Issuer with post issue face value capital up to Rs.10 crores shall be covered under
the SME Platform, Issuer with post issue face value capital between Rs.10 – 25
crores may get listed at SME Platform and Issue with post issue face value capital
above Rs.25 crores has to necessarily listed at main board of the Exchanges
 Suitable provisions for migration to/ from main board
 The minimum application amount as well as minimum trading lot shall not be less
than Rs.1,00,000/ All existing Trading Members would be eligible to participate in SME exchange
without any further registration
 100% underwritten issues and Merchant Banker/s shall underwrite 15% in their
own account
 The Merchant Banker to the issue will undertake market making through a stock
broker who is registered as market maker with SME Exchange. The Merchant
Banker shall be responsible for market making for a minimum period of 3 years
20
SME Exchange – SEBI Guidelines – Obligations of
Market Makers
 Shall be required to provide two way quote for 75% of time in a day, to be
monitored by the Stock exchange
 The minimum depth of the quote shall be Rs.1 lakh
 Not more than 5 market makers for a scrip
 Market Makers may compete with the other Market Makers
 Market Maker allowed to deregister by giving one month notice to the exchange
 The exchange shall prescribe the minimum spread between Bid and Ask price
 During the compulsory market making period, the promoter holding shall not be
eligible for the offering to market makers
21
Interpretation of Regulations (1/5)
 ICDR Guidelines chapter XA clearly specifies that it will attract all the provisions of
main ICDR guidelines where the exemptions are not being provided under these
provisions.
 Clearing and Settlement Mechanism
– The existing clearing and settlement of the equity (cash) segment will be
extended to the SME segment also.
22
Interpretation of Regulations (2/5)
 Investor Protection Fund
– The provisions of the IPF for the main board apply to the SME Exchange also.
 Takeover Code Regulations
– Takeover code will not be applicable to the Market Maker.
– The buy or sell of the shares by the Market Maker for Market Making activity
is exempted.
– However, the takeover code will apply for all the investors.
Interpretation of Regulations (3/5)
 Long Term Capital Gain tax
– The sale of unlisted shares in short term attract the capital gain tax of 30%
and the long term capital gain tax of 10%.
– The sale of listed securities in the short term attract the capital gain tax of
10% and there is no long term capital gains tax.
– This makes it clear that the listing of shares very attractive.
 Risk Management System
– The Risk Management will be applicable to the BSE SME Exchange the same
way as that of the BSE main board. All the M-to-M (Mark to Mark) Margins,
VAR Margins, ELM (Extreme Loss Margin) and special margins as applicable to
the main board will also apply for the SME Exchange.
Interpretation of Regulations (4/5)
 Grading of IPOs
– As per ICDR guidelines, the grading of IPOs is compulsory. The same applies
to the companies to be listed on the BSE SME Exchange also.
 Website for the SME Companies
– The Regulator has made it mandatory for the companies to have websites, if
they propose to be listed on the main board.
– The same applies to the SME companies, if they want to get listed on the BSE
SME Exchange.
Interpretation of Regulations (5/5)
 Investor Grievance Redressal System
– The Exchange has the IGRC (Investor Grievance Redressal Committee) to redress
the complaints of the investors against the members.
– If amicable solution is not reached, the members can opt for arbitration.
– The Grievance Redressal System of the equity (cash) segment will be made
available for the SME Exchange also.
 Corporate Governance
– Clause 49 of the listing agreement and corporate governance will be applicable for
the SME Exchanges also.
– There has to be 50% independent Directors and the remaining 50% will be
promoter Directors.
26
E.
About BSE SME Exchange
Trading System of SME Exchange
 The BSE is leveraging the existing equity platform for the BSE SME.
The BSE SME Segment will be part of the BSE BOLT System.
 The companies on the SME Exchange will be included as a group in the BSE’s BOLT
system – ‘M’ and ‘MT’ Groups.
 The systems necessary for monitoring the market making activity and providing the
quotes are made ready to comply with SEBI Regulations.
 The trading time of this platform is from 09:00 am to 03:30 pm
 BSE is fully equipped to launch the BSE SME Platform.
28
Market Makers
 Only the Members of the stock exchanges recognized by the SEBI can act as
Market Makers.
 The members desirous of becoming market maker have to get themselves
registered as market maker with the BSE SME Exchange by filing the registration
form.
 These members should have a minimum experience of 3 years, minimum net
worth of Rs. 5 crore and a daily turn over of Rs. 10 crore. The market maker shall
have additional net worth of Rs. 2 crore for additional scrip.
29
Market Making & Nominated Investors
 All the market makers in a scrip will provide 2-way quotes for 75% of the time in a
trading day.
 The market makers will have to hold 5% of the specified security to be listed at the
time of allotment in their inventory to do the market making.
 The market makers can also buy from or sell to the nominated investors the
required shares for market making. The merchant banker and nominated investor
need to enter into an agreement in this regard.
 The nominated investors can be QIBs and PE Firms who are registered with the
respective Regulator.
30
Bid and Ask Spread on SME Exchange

BSE has prescribed the slab wise spread for the scrips depending upon their
secondary market transaction price.
 The spread prescribed varies from 5% to 10% depending on share price.
 A minimum spread of 5% is prescribed, which shall facilitate the market making
and make it easier for the members empanelled.
31
Trading of Odd Lots
 Odd lots may get created because of the corporate action taken by the company
from time to time, like issuing bonus shares, warrants and rights issues.
 According to the SEBI guidelines, the odd lots can be sold only to market makers
and the investor has to give the declaration that he is selling all the odd lot shares
of the particular scrip to the market maker.
Penalties for Market Making Violations
 All the market makers for scrip put together shall do market making for more than
75% of the market timing.
 In case the market makers for scrip fail to comply with these provisions, BSE has
prescribed the monetary penalties.
33
Migration from SME Platform to Main Board
 Any SME on BSE SME Platform having a paid up capital more than Rs. 10 crores can
move to the main board provided that the special resolution is passed in the AGM
in favor, with at least two third of the number of votes cast by shareholders other
than promoter shareholders and then apply to BSE SME.
 The SME migrating to the main board has to comply with all the main board norms
like minimum 1000 investors, pay main board listing fees and do the quarterly
compliance etc.
34
F.
Key Players
Key Players
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Venture Capital Funds
P/E funds
Angel Investors
HNIs
Financial Institutions
NBFCs
QIBs
Registrars
Merchant Bankers
Members and Market Makers
Financial Advisors – CSs, CAs, CFOs etc
SME Companies
36
G.
Preparations for the IPO
Preparations for the IPO – Contents of the Offer
Document
38
Preparations for the IPO – Relevance of Due
Diligence
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Due Diligence on the various approvals required from regulatory bodies
Due diligence on the applicability of various regulations
Risk factors associated with the company
External environment effecting the company
Magnitude and listing out of litigations
Business activity
Past performance and financial results
Material contracts and agreements
Detailed report on promoters & management
39
Preparations for the IPO – Role of Merchant
Banker
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Selection of investment banker
Selection of registrar and transfer agent (RTA)
Selection of syndicate member /sub- syndicate members
Selection of electronic media and advertising agency
Selection of Escrow Bankers
Understanding of regulations pertaining to Stock Exchange, SEBI and the other
regulatory bodies
40
Preparations for the IPO – Marketing Strategy
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Positioning of company through sustained media efforts including visual media
Regular interaction with brokers, FII & FIs and HNIs
Creating awareness about the issue to the investors
Selection of potential bidding centers
Effective equity story supplemented by proper research
Presentation to the investors and the analysts
Creating sustainable valuation and shareholder base
Effective communication for better results
41
H.
Beneficial Aspects
How does the SME Exchange help SMEs (1/2)
 A dedicated exchange for these SMEs will help them in finding a solution to their
financial requirements and crunching expansion plans.
 Listing of a company gives better valuation to the company. The debt and equity ratios
will improve and balance sheet will look much healthier.
 The listed SMEs will unlock their wealth in the medium to long term and will do the
wealth creation for the promoters and the investors.
 The listed SMEs will get better visibility among the investors. The investor base of the
company improves for the listed companies in medium term.
43
How does the SME exchange help SMEs (2/2)
 The repose of faith by the investors – domestic and foreigners in the listed SMEs is
high. Transparency and corporate governance will improve manifold by listing on SME
Platform.
 Listed company will have easy accessibility to alternate funding options. The banks,
P/E funds and other financial institutions provide them the loans very easily. The fund
raising through ADRs and GDRs become easier. Also, the company can raise more
funds through follow on public offering.
 The tax benefits are also immense. The long term capital gain tax on listed company is
zero.
44
Challenges for launch of SME Exchange (1/2)
 The working of SME Exchange is not well understood by the SMEs in the country. The
SMEs are mostly not well informed of the capital market issues and modalities of
raising equity capital. There is need for conducting lot of awareness programs to
educate them.
 Merchant Bankers used to handle only the primary market issues so far. On the SME
platform, he has to assist the company in the secondary market through market
making for three years.
 Merchant banker, issuer and market maker have to work as team for three years to
make the market making activity a success. This is a huge challenge.
 The investor base is limited and only the investors with a minimum investment of Rs.
One lakh are allowed to participate.
45
Challenges for launch of SME Exchange (2/2)
 We have interacted with the market intermediaries over the last six months. There
were apprehensions about the SME model in the beginning.
 After few rounds of discussions, we see the substantial change in the perception of
the SME platform. Many merchant bankers are optimistic and the members with
market making experience are positive about the SME Platform.
 We are hopeful that these challenges will not be a roadblock for the successful take
off of the BSE SME Platform.
46
Outlook on the SME Exchange (1/2)
 A large number of merchant bankers are optimistic about the SME Exchange/
Platform. Except top 5 MBs, most of the medium size MBs are keen and already
started working.
 The market makers will get the fees out of the issue expenses, like the merchant
bankers. The members who have the experience of market making in the past are
positive on the scope of market making in this segment.
 Investors’ outlook is not yet clear. But the investors with medium to long term
perspective are optimistic on wealth creation opportunity in this segment.
 Regarding the SMEs, the response has been extra ordinarily exciting. The SMEs are
enthusiastic about the opportunity to raise the equity capital on BSE SME.
47
Outlook on the SME Exchange (2/2)
 The professionals like Company Secretaries and Chartered Accountants have an
important role to play in educating the promoters of the SMEs and guiding them in
raising equity capital on BSE SME Platform.
 The member brokers and the sub brokers having branches and franchises spread
across the country can play important role in mobilizing and educating the SMEs with
their market knowledge and experience.
48
I.
Promoting the BSE SME Exchange
Attracting Promising SMEs
 Approaching SMEs with high growth potential
 Illustrating Advantages of Listing
 Co-coordinating with Banks and Angel Investors for bringing the companies on
this platform
 Target industries at different locations and SME clusters
 Attract promising SMEs and the start- ups by professionals
 Attracting the SMEs through
– Chamber of commerce
– Industry department under state government
– Industry Associations
50
Marketing Activities
 Road Shows
 Jointly organizing seminars with the ‘Chamber of Commerce' of different states
for illustrating advantages of listing
 Training Programs
 Advisory Committee
 Segment Awareness Programs
 Reaching the potential SME companies through web portals and mails
51
Reaching SMEs across the country
 We have been conducting the Seminars for educating the SMEs on the benefits of
listing and preparations required for listing on the SME Platform.
 We have already conducted the Seminars in Maharashtra, Gujarat, Andhra Pradesh,
New Delhi, Kolkata etc and lined up large number of Seminars to cover other parts of
the country. We have detailed Marketing plan to reach out to the SMEs spread across
the country.
 We are tying up with channel partners which include various institutes and
associations engaged in the development of SMEs so as to create awareness among
the SME companies about the benefits of listing at this platform.
 We are also educating the professionals through the platform of ICSI and ICAI , as the
professionals can play important role in educating the promoters and management of
SMEs.
52