Capital market access Advantages for SMEs
Small and Medium Enterprises (SMEs) are important factors in economic growth and transformation, creating positive value for the economy, contributing towards sustainable and balanced economic growth, employment and social stability. They are the silent drivers of economy. And yet despite their importance, SMEs in emerging markets frequently suffer from insufficient access to financing, preventing these businesses from expanding their production and making a larger social and economic impact. Their access to finance is limited to the entrepreneurs own funds and bank finances. They lack their ability to access funds is on account of lack of collateral security, stringent lending criteria and short repayment terms. The lack of capital to the SMEs substantially diminishes the growth potential of these small and medium enterprises and, consequentially, has a profound negative impact on employment, the development of economy, and tax revenues that are essential to the country’s development.
A vibrant SME sector is also a key element in job creation, on the job training, poverty reduction, wealth creation, sustainable economic growth, and stability. To overcome inaccessibility of funding requirements, capital markets realized the need for a separate exchange for SME segment. Ensuring adequate investor protection and at the same time establishing an effective regulatory framework which would enable SMEs to access finance from the capital markets was a major challenge due to the risky nature of investing in SMEs.
Taking into consideration the above challenges the Exchanges launched their SME platform in 2012. NSE named its SME platform as EMERGE to facilitate the smaller growing corporates to raise funds through IPO and list on the Exchange and later migrate to the main board of the NSE. This platform provides a listing opportunity to the SMEs with minimum compliances and cost compared to the main board. The requirement of track record, cost, corporate governance norms, reporting requirements and time frame for listing are quite relaxed for an SME, making listing on an SME platform comparatively easier.
NSE has specified the following criteria:
- The company should have a track record of at least 3 years.
- The company should have positive cash accruals (earnings before depreciation and tax) from operations for at least two financial years, preceding the application.
- Its networth should be positive.
SME listing provides multiple benefits to the companies such as higher visibility, enhanced liquidity and better borrowing terms with banks. Listing raises a company’s public profile with customers, suppliers, investors, financial institutions and the media. The SME listing also benefits its investors, both existing and proposed, by providing an exit route to private equity investors as well as liquidity to the ESOP holding employees. Listing pre-supposes good corporate governance, which results in sustainability and helps generate an independent valuation of the company. Once listed, these companies are well equipped to exploit other avenues of raising capital such as rights issue, preferential issues, qualified institutions placements (QIP) and other international fund-raising instruments, such as FCCBs, ADRs and GDRs etc. Banks and financial institutions also prefer to extend finance to listed companies as against unlisted ones.
Benefits accrue at the time of listing as the companies prepare themselves for this event and also throughout the life of the company. Regulatory supervision and governance controls in the form of routine compliances become a part of the company’s day-to-day existence. Timely disclosure of material information not only leads to improved governance but also protects investors’ interest. The Financial assistance empowers a company to overcome the impediments to its growth and lead to its production of higher value-added products or services for both domestic and international consumers, while accelerating the development of its surrounding community. SME investment leverages promising businesses to catalyze socio-economic growth and entrepreneurship in local communities and markets.
Spurred by investor interest, SMEs raised nearly `1,000 crore through IPOs in financial year ended March 2019. Geographically, Gujarat dominated the IPO space, followed by Maharashtra, Madhya Pradesh, Delhi, Rajasthan, These companies represent diverse industry base such as media and entertainment, manufacturing, textiles, engineering, finance, chemicals, agriculture, food processing and construction. West Bengal also witnessed listings last year in diversified sector. The total number of listings on the NSE Emerge platform is at 198 as on June 2019. Total funds raised on the platform till date is approx. `3,103 crore with market capitalization of approx. `11,252 crore.