Introduction:
Small and Medium Enterprises (SMEs) are the backbone of economies worldwide, contributing significantly to job creation, innovation, and economic growth. Recognizing their importance, governments and financial institutions have taken several initiatives to support the growth and development of SMEs. One such initiative that has gained traction in recent years is the establishment of SME exchanges. This article explores the concept of SME exchanges, their relevance in today’s business landscape, and the benefits they offer to small and medium-sized enterprises.
Understanding SME Exchanges:
SME exchanges, also known as SME platforms, are specialized stock exchanges or trading platforms that provide a marketplace for small and medium-sized enterprises to raise capital and trade their securities. These exchanges cater the needs of SMEs, offering them an alternative to traditional capital-raising avenues such as IPOs or private placements.
In India, SEBI defined SME exchanges as a trading platform of a recognised stock exchange or a dedicated exchange permitted by SEBI to list securities issued in accordance with Chapter XA of the SEBI (ICDR) Regulations, excluding the Main Board.
SEBI issued guidelines for the establishment of new exchanges for SMEs. In the year 2012, the NSE and BSE established separate SME stock exchanges in India. The BSE exchange is known as the ‘SME‘ exchange, while the NSE exchange is known as the ‘Emerge‘ exchange.
Data as on 31-03-2022:
| Particulars | BSE(SME) | NSE(EMERGE) |
| No of Companies listed | 370 | 235 |
| Total Amount of Money Raised till Date (Rs. Cr.) | 3,928 | 3,298 |
| Market Cap of the Companies listed (Rs. In Crores) | 18,291 | 15,926 |
Tax Benefits to Listed SMEs:
Besides other benefits, both BSE and NSE SME Exchange also offer Tax Benefits to the SMEs getting listed on their SME Platforms. The tax benefits of SME listing are listed below:
| Capital Gain Tax | Listed | Unlisted |
| Long Term Capital Gain Tax | Nil | 20% |
| Short Term Capital Gain Tax | 15% | 30% |
Relevance of SME Exchanges:
- Access to Capital:
One of the most significant challenges faced by SMEs is accessing adequate capital for their growth and expansion plans. SME exchanges helps to fill this gap by providing a regulated and transparent platform for SMEs to raise capital from a diverse range of investors, including retail investors, venture capitalists, and institutional investors. The maximum post-issue paid-up capital should be 25 crores or less.
- Enhanced Visibility and Credibility:
Listing on an SME exchange enhances the credibility of SMEs. It offers them a platform to showcase their growth potential, business prospects, and financial performance to a wider investor base. This increased visibility not only attracts potential investors but also opens doors to partnerships, collaborations, and business opportunities that can further accelerate the growth of SMEs.
- Liquidity for Stakeholders:
SME exchanges provide liquidity to the stakeholders of SMEs. By offering a secondary market for trading securities, SME exchanges allow these stakeholders to realize the value of their investments and encourage their participation in the growth journey of SMEs. The market makers also play an important role in the SME exchanges. Market makers are mandatory for a period as intimated by the Merchant Bankers, they have to make a two way quotes in the exchange, they will compete with other market makers for a better price discovery, The minimum depth of the quote shall be one lot. However, the investors with holding the share in one lot shall be allowed to offer their holding to the Market Maker in that scrip provided that he sells his entire holding in that scrip in one lot along with a declaration to the effect to the Selling Member, there would not be more than five Market Makers for a scrip. These would be selected on the basis of the criteria set by the Exchange.
- Regulatory Framework and Investor Protection:
SME exchanges operate under a well-defined regulatory framework that ensures transparency, disclosure, and investor protection. This regulatory oversight helps build trust and confidence among investors, encouraging them to participate in the market and invest in SMEs. Additionally, the listing requirements and compliance standards imposed by SME exchanges encourage SMEs to adopt good governance practices, which can contribute to their long-term sustainability and success.
- Networking and Knowledge Sharing:
SME exchanges often serve as hubs for networking and knowledge sharing among entrepreneurs, investors, and industry experts. They organize events, conferences, and seminars to facilitate interactions and foster collaborations. These platforms enable SMEs to learn from successful enterprises, gain industry insights, and establish valuable connections that can open doors to partnerships, mentorship, and growth opportunities.
Challenges in front of SME Exchange:
The lack of expertise mentoring in the case of a Private Equity or VC investor exists in SME exchanges. An average retail investor might not be able to effectively judge the risk involved in investing in an SME. Liquidity will decrease if the investor demand and traded volume is low and vice versa. Unfamiliarity with the exchange model as the SME exchange is a new model. During periods of financial crisis, the SMEs would not be able to raise fresh capital from the markets. Building trust in the SME exchange and making it successful will take considerate amount of effort and time from the market participants and the regulator.
Short brief on listing procedures in SME exchanges:
- Appointment of Intermediaries
This stage includes appointment of various intermediaries required for listing under SME Exchange such as Merchant Bankers registered with SEBI to act as Lead Manager to the Issue, Underwriters and Legal Advisors.
- Pre- IPO Stage
This refers to the procedural aspects for listing under SME Exchange which includes Increase of Authorised Share Capital, passing of resolution for further issue of share capital under section 62(1)(c) of the Companies Act, 2013, etc.
- Preparation Stage
This stage includes conducting of Due diligence by the Lead Manager to the Issue i.e., the Merchant bankers who would check all the documentation including all the financial documents, material contracts, Government Approvals, Promoter details etc. This exercise would also help in preparing Offer Document appropriately.
- In-principal approval of draft prospectus
The Issuer shall file the draft prospectus along with the documents in accordance with the SEBI (ICDR) Regulations, other statutes, notifications, circulars, etc. governing preparation, and issue of prospectus prevailing at the relevant time. The Issuers may particularly bear in mind the provisions of Companies Act, Securities Contracts (Regulation) Act, the SEBI Act and the relevant subordinate legislations thereto.
- Application to BSE SME Exchange
On completion of Due diligence by the merchant banker along with approval of the Draft prospectus, an application shall be filed with the stock exchange for admission of their securities to dealings in their respective exchange.
- Filing of RHP/Prospectus
Merchant Banker then files these documents with the ROC indicating the opening and closing date of the issue. Once approval is received from the ROC, they intimate the Exchange regarding the opening dates of the issue along with the required documents.
- Post Listing
Stock Exchange then finalizes the basis of allotment and issues the notice regarding listing and trading.
Support provided by the State Governments on SME Listing.
The state governments provide various assistance for the MSME’s in their listing process. For instance, the Gujarat Government provides 25% of Eligible expenditure incurred on raising of fund through SME Exchange, maximum up to Rs. 5 Lakhs one time after successful raising of equity& Listing on SME Exchange Platform, the Tamil Nadu Government through FaME (Facilitating MSME) reimburses 75%of the expenditure incurred for listing, up to a maximum of Rs. 30 lakhs towards assistance for listing and raising money in the SME stock exchanges.
(This Article is written by C. Ajith Kumar, Audit Executive at R V K S And Associates)