At a time when the SME sector is struggling for funding avenues, it is interesting to note that platforms like BSE SME, has seen success. While many were able to capitalise on this listing to grow their business, there are other SMEs that have graduated to main exchange as well. Ajay Thakur, head of BSE SME and start-ups, goes into the finer details of the journey, in a chat with Pankaj Joshi and R N Bhaskar.
Edited Excerpts:
How has the concept of SME-dedicated platform evolved?
g The concept of a platform for SMEs (Small-to-Medium Enterprises) to get listed is not a recent one. In 1990, we had the Over The Counter Exchange of India (OTCEI) come up, and small businesses got their listing even then.
If you see OTCEI in totality, it was a great concept. Share trading was done online, there was transfer of receipts, not share certificates. The reason why it did not take off was because of the supporting environment.
Firstly, technology was not robust enough and then there were only two service providers based in Mumbai, who were not oriented to cope with glitches and growth requirements. Plus you must understand that, in terms of competition, it was dealing with two giant exchanges and that too was a tall order.
Overall, OTCEI was a concept ahead of time and so it failed, with the unfortunate side effect that it hit the concept of SME listing hard. Another issue was that the first half of the nineties saw lots of unfortunate scams in different categories of the capital market, which again acted as a dampener.
The guidelines got tougher, compliances became stricter, more frequent and naturally more costly. The upshot of all this over the next 10-15 years was that SMEs shied away from listing.
This was the feedback we got especially from concerned circles in Tier-II and Tier-III cities. There was a specific request for a separate platform for small companies with lesser costs and less stringent compliances.
A committee was set up in 2008 for looking into the matter and its recommendation, in 2010, was that a separate platform was justified. BSE was the first exchange to get the SME platform approval in September 2011.
How was the journey until now?
It was extremely demanding at first as the process of getting companies onboard was slow. This was partly because for the first time there was convergence of primary and secondary market responsibilities.
Apart from evaluation of issue, meeting compliances and ensuring subscription and listing, the merchant banker also had the market making responsibility for first three years.
This was putting off merchant bankers, till I could get one —Aryaman Financial Services— to look at this exchange for his client. The first company (BCB Financial Services) was listed on the platform on March 13, 2012.
Generally, my experience was that people tended to be pessimistic about the whole thing. The first three years I would have met around 5,000 companies and we saw 60-70 listings.
In 2015, we got our hundredth listing. Beyond that we had around 50 listings in 2016, 80 in 2017 and 90 in 2018. Today for around 300 listings, I have met 28,000 promoters across 1,800 seminars nationwide.
Where is the model going from here?
From here on it can only get better. If you are talking of targets, we want to double and have 600 listed SMEs in the next three years.
My numbers are approximate, but you can see that the market capitalisation of the listed companies is in the range of Rs 18,500 crore (initially Rs 3,200 crore was raised through IPOs), which includes 63 companies which have migrated to the main exchange.
This is the obvious outcome. Clearly, the value appreciation will be the backbone of rise in revenues and profits. Beyond that, it is well documented that employment in these companies also show growth.
As per our estimates, around one million incremental jobs would have been created, subsequent to listing of these 300 companies.
Prior to listing, SME companies are usually hounded by two major fears. First is fear of massive compliances and second is the fear of loss of company control through a hostile takeover.
Post listing, these companies have appreciated that these two are largely a mental block. Against that, they appreciate the benefits. Compliance ensures greater comfort across the spectrum of stakeholders. Loss of control doesn't happen with marginal divestments.
The basic purpose—unlocking value of the promoter sweat and blood—does take place after the market capitalisation testifies. There is massive rise in visibility, in credibility in banking circles, in repeat orders from clients and in a few cases through follow-on offers. There is no doubt about the potential of the platform in the mind of listed entities.
Do you agree with the overall framework within which the SME exchange operates?
By and large, yes. The three-year compulsory market making is definitely a benefit to the company and to prospective investors. When you take this in conjunction with the compulsory underwriting of the issue, it means that elements like operators (person who wants to rig share price for short term so that he gains and later on whenever price drops, common person suffers losses) and fly by night are weeded out.
Given the minimum lot size of Rs 1 lakh, the pure retail investor is kept out and serious retail people come in, who would want to study the business numbers, depth of daily volumes and really take an informed long-term decision. So what we have is an investor community where probability of collapses is less, which is the bane of investing in small companies.
Now we come to the companies—compliance demands are that half-yearly results should be filed against quarterly on the main platform. Also, the annual results need to be audited, whereas the half-yearly report can have a limited review.
Also, these companies are not required to have results published in newspapers—just putting them on the company website and our site would be enough.
As far as transition criteria (to the main trading platform) go, there are three which have to be satisfied. First, after two years of listing, the paid-up capital would need to cross Rs 10 crore. Secondly the company market capitalisation must be above Rs 25 crore.
Lastly, as a procedure, the company has to get approval from two thirds of the non-promoter shareholders in the AGM process. When all three are on the table, migration is possible.
What kind of positives would you wish for from here?
If you ask for a wishlist, I would wish for more investors to come in and that too a more diversified lot. Today's investors are broadly from the following categories—portfolio management services, the HNI category, the wealth management segment and the alternative investment funds.
Possibly, the government policy could catalyse this. First, there should be tax incentive for such long-term investment done by investors. Also, it would make sense for companies on this platform to be exempted from the dividend distribution tax.
It may also work if there is a government fund to invest an indicative amount of Rs 1 crore (within conditions and guidelines). The government authorities should appreciate that their equity investments have generally created wealth for themselves.
Beyond this, the wish is that investors should see this platform as an entry point for good investments, rather than an exit point at any level. They should take pains to see that the company balance sheet should be balanced—namely equity should be harnessed and company should be left free from the spectre of too much debt.
