What are SMEs?
Small and Medium Enterprises (SMEs), including micro-enterprises, are those industries that play a crucial role in Indian economy by producing a diverse range of products & services. SMEs including registered and unregistered, have made a significant contribution to India’s GDP from FY12 to FY15. They are considered to be the backbone of the overall economic growth and a key contributor to employment generation in the country. Initiatives like ‘Make in India’, ‘Startup India’, MUDRA Yojana and ‘Skill India’ envision SMEs as the catalyst to socio-economic transformation in India.
Due to the SMEs low scale production and non-adoption of new technology, face many finance problems. For these enterprises financing is the biggest challenge. As we know that SMEs have a big share in generating employment opportunities and play a crucial role in the economic growth of the country so, it becomes essential that their financial needs are catered.
In order to provide finance to the SMEs, stock exchanges have established a separate platform for them so that they can raise funds through investors in stock market. For SME stocks to get listed and being traded on an exchange, the company has to come up with an Initial Public Offer (IPO) at exchange’s SME platform.
Criteria for listing of SMEs on the exchange
- Bombay Stock Exchange BSE, countries oldest stock exchange offers platform called ‘BSE SME’ for SMEs.
- National Stock Exchange (NSE), the largest stock exchange in India offers platform called ‘SME EMERGE’ for SMEs.
About BSE SME
- The net tangible asset of at least Rs. 3 crore, as per the latest audited financial statements.
- Net worth (excluding revaluation reserves) of at least Rs. 3 crore, as per the latest audited financial statements.
- The post issue paid up capital of the company shall be Rs 3 crore
- Companies shall mandatorily have a website
- The company shall mandatorily facilitate trading in demat securities and enter into an agreement with both the depositories.
- Companies should have at distributable profits in terms of Section 124 of the Companies Act 2013, least two years of our immediately preceding three financial years (excluding extraordinary income).
- For SME IPOs, as per SEBI guidelines, minimum trading lot varies from 100 to 10000 depending upon the price band of the issue. Such lots are reviewed periodically and adjusted depending upon it’s price movements, post listings.
About NIFTY SME EMERGE Index
- BSE SME is the market leader in the SME segment and currently has 89% market share.
- Till now 163 companies have got listed and others are in process
- The index has appreciated more than 1000% since launch and is already the top SME index in the world in terms of YTD.
NIFTY SME EMERGE Index is designed to reflect the performance of a portfolio of eligible small and medium enterprises that are listed on NSE EMERGE platform.
- The index has a base date of December 01, 2016 and a base value of 1000
- To form part of the NIFTY SME EMERGE Index, stocks should qualify the following eligibility criteria:
- Stocks should be listed under NSE EMERGE platform
- At the time of quarterly review, stocks should have traded for a minimum of 25% of trading days subject to a minimum of 10 trading days during the previous 3 months
- Index is reconstituted on a quarterly basis
- Constituents are weighted based on free float market capitalization
SME IPOs are gaining popularity among the investors in India. Some of the SME IPOs have been oversubscribed by as much as 85 times. This indicates increasing trust shown by investors in the small companies.
How do you trade in SMEs?
Trading on the SME exchanges is almost like the normal buy and selling procedure. It does not require any extra procedures. However, some trading rules differ.
How to apply in SME IPO?
- The SME exchange has a larger-than-normal lot size – the minimum number of shares you can buy or sell in each transaction. You cannot trade amounts lower than Rs 1 lakh. Also, the lot size varies with the price of the stocks. For example, on the NSE Emerge, if the stock price is lower than Rs 14, then the lot size is 10,000. However, if the stock price is between Rs 120 and Rs 150, then the lot size falls to 1,000.
- Risk is quite high while investing in small and medium-sized companies, at the same time these companies have a high return generating capacity
- Liquidity is low in SME exchanges as compared to the normal stock exchanges.
The application procedure of the SME IPO is the same as that for a normal IPO. One can apply through the ASBA facility in two ways:
- Offline method: The investor need to physically get the ASBA application form for the IPO through sources such as banks, investment consultants, brokers and other sources. The form needs to be filled and submitted in the designated bank with the money.
If the stocks are not allotted to you then a refund check will be sent to your address.
- Online method: This is the easiest and convenient way of applying for an IPO. You simply need to have a net banking account provided by any bank or a demat account with access to online trading. The investors then need to choose the IPO he wants to invest in.
If the stocks are not allotted to him/her, the money will be credited back to his account via online fund transfer.
CURRENT SME IPO TRENDS
The year 2017 has been a blockbuster year for SME initial public offers (IP0s). With 123 companies mobilizing about Rs1640 crore in 2017. It was a threefold jump in terms of amount raised compared to 2016. While the number of issues was nearly double the previous year. The total amount raised in 2017 alone by SMEs was more than the aggregate amount raised in the previous five years, industry data showed. Although in comparative terms -about Rs 65,000 crate raised through IP0s by large companies market players said the trend is definitely positive for SMEs tapping the stock market for funds. The current year also witnessed two SME IPOS that was subscribed more than 100 times with the highest being a 261-time subscription for Ice Make Refrigeration that generated a book size of Rs. 6200 crore for the issue size of Rs 23.7 crore. And in early November, the IPO for AM Integrated Solutions was subscribed 200 times. The SME boost came on the back of strong growth potentials, attractive valuations and increasing institutional interest for shares of small & medium enterprises (SMEs). “SMEs come up with attractive valuations at an early stage of their business cycle.”
The current year also witnessed, for the first time since dedicated stock trading platforms for SME shares were launched in 2012, two anchor investors picking up stakes in an SME, One Point One Solutions, just a day before the IPO was opened. On Friday the IPO closed with 85 times oversubscription with a total book size of about Rs 2700 crore for its Rs 32 crore non-anchor part. This made it the third most subscribed SME IPO in India. According to data on the NSE website, the HNI portion was subscribed 336 times with total demand for 31.7 crore shares, the retail part was subscribed 15 times. According, to the merchant banker at 336 times, this was the highest ever HNI subscription figure for any SME IPO.