NSE-EMERGE is a market place promoted by National Stock Exchange (NSE) to bring together investors and emerging SMEs on a common exchange platform. It offers opportunities to investors to invest in emerging businesses while offering capital raising opportunities to credible and fast growing businesses with good governance standards. It is an ideal platform to raise funds for companies on a growth path, but not large enough to list on the main board.Here are excerpts of an exclusive conversation with Seema Nayak, Head, SME, National Stock Exchange.
Q: Finance has always been a challenge for SMEs. How do you see SME exchange platforms help them address this issue?
A: The first and common challenge that SMEs face is the lack of access to appropriate capital, both from the banking sector and from capital markets.
Heavy dependence on debt capital from banks and financial institutions brings distortions in the capital structure in addition to increasing the vulnerability of the SMEs’ cash flows in adverse economic conditions. Besides, there are several problems in over-leveraging through loans from banks. It is, therefore, essential that SMEs should be enabled to access the capital market for raising equity capital.
Indian capital markets lacked special instruments that can fit SMEs capital needs and hence, SME listing platform was designed by regulators as a viable option for efficient rising of capital by the SMEs. Besides, because listed SMEs are subject to higher scrutiny and higher governance requirements, they will also usually be able to get better rates when they approach their banks for debt financing. Additionally, capital infusion improves the leveraging capacity to attract more funds for growth. SME Stock Exchange can do wonders for thousands of SMEs in India gasping for funds despite having huge growth opportunities. It will enable the SMEs to unlock their value.
Q: Please give us an overview of NSE’s SME platform – NSE Emerge.
A: The SME platform is a regulated platform under the purview of SEBI. A new chapter (XB) was added to the ICDR to define the regulations applicable to the SME platforms in 2010. Pursuant to the same,NSE launched its SME platform, NSE-EMERGE in September 2012.
NSE has endeavoured to build a credible platform for SMEs which would help them raise risk capital from informed investors who are looking for investing early in promising companies. We believe EMERGE has an important role to play in facilitating capital raising by SMEs. We have seen enthusiasm for and understanding of the platform in stakeholders from Entrepreneurs to Intermediaries to Investors. Currently 16 companies have been listed with an approximate fund raising of Rs. 197 crore. Further, 21 companies are listed on Emerge-ITP platform which allows start-ups to list without an initial public offering (IPO).
We have a promising pipeline of companies that are in the process of coming on board across all sectors and regions and we expect the momentum to sustain and strengthen.
Q: What are the benefits to SMEs through listing on NSE Emerge?
A: Going public enables a company to raise capital and allows its shares to be publicly traded. Apart from this very obvious benefit, there are some more advantages of listing:
- Wider shareholder base: The Company’s shares would be held by a wider base of shareholders resulting in liquidity for various category of shareholders
- Higher profile and visibility: Improved visibility of the SMEs listed on the SME board would improve credibility with its various stakeholders including clients, suppliers, financiers, etc.
- Exit to existing investors: Early stage investors in the companies including angel and VC investors can be provided exit through listing on SME platform.
- Employee incentives: Listing would enable SME companies to provide stock based incentives to their key employees thus improving their retention as well as facilitate attraction of high quality talent.
- Seamless path to the main Board: The platform would provide a seamless path to the main board as the SME grows in operations and size.
- Other benefits:Because of the increased scrutiny, public companies can usually get better rates when they issue debt. As long as there is market demand, a public company can always issue more stock. Mergers and acquisitions are easier to do because stock can be issued as part of the deal.
Q: What is the procedure to list on NSE Emerge?
A: The Listing process for NSE Emerge is fairly simple as illustrated below:
- The first step is to appoint a Merchant Banker, who will prepare the necessary documentation for filing. This will involve a thorough due diligence of the company, including financial statements,Board structure and processes, management team, planning and control systems, internal audit system etc.
- This next step is submission of DRHP by the Merchant Banker with the Exchange as per SEBI guidelines along with application for in principal approval of the Exchange
- On receiving Exchange approval, the Merchant banker files the RHP/ Prospectus with the ROC indicating the dates for opening and closing of the issue
- Post approval, the Exchange is intimated of the IPO dates and then the issue opens for public offering.
Q: What are the eligibility criteria for one to list on NSE Emerge?
A: In addition to the criteria specified by SEBI for eligibility of a company to list on an SME Platform (any company with a post issue paid up capital of less than Rs.25 crs), NSE has specified the following criteria:
- The company should have a track record of atleast 3 years.
- The company should have positive cash accruals (earnings before depreciation and tax) from
operations for atleast 2 financial years, preceding the application, and
- Its net-worth should be positive.
NSE’s EMERGE is a segment within NSE and enjoys the benefits of a well-established exchange. The trading terminals of the main exchange, its risk management and surveillance systems, the existing infrastructure are all available to the SME platform also. The members and other intermediaries also continue to be the same as the main board.
Q: What is the cost structure of listing on NSE Emerge?
A: The cost of listing primarily comprises of the Merchant Bankers fees for the services offered by them. It may be prudent to mention here that the intermediary network which the Exchange has been nurturing in the SME segmenthas the competencies and bandwidth to understand unique needs of SMEs and is conscious of the fact the SMEs are very cost sensitive.
Q: What is the investors’ profile of NSE Emerge?
A: SMEs which are still in their growth phase would have a different risk profile compared to larger businesses that are listed on the main Exchange platform. Such companies need patient funding from serious medium- to long-term investors who are looking for opportunities to invest early in promising companies.
As such, SME investors are primarily those with a long term view, whether institutional or otherwise. SMEs also see investments from their stakeholders groups who are associated with the company, either directly or indirectly. Longer term funds give the companies an opportunity to absorb the capital and deliver performance
Q: What is Emerge ITP? Please throw some light on how it hopes to enable &empower India’s Start Up ecosystem.
A: NSE has also launched EMERGE-ITP which allows start-ups to list with or without an initial public offering (IPO). The platform connects growing businesses to a pool of sophisticated investors including institutions, angel associations and venture capital funds.
Listing on EMERGE-ITP enables unlocking shareholder wealth. Being listed with a segment of NSE will offer high visibility and credibility to such companies. The companies will get used to compliances of a regulated platform and this will help them set the stage for a larger fund offering in future.
It will be easier for the early investors to get the next round of funding for a listed company which is already enjoying the visibility of the platform. This will lead to better portfolio churn and smoother flow of risk capital in the ecosystem. Further, transactions on the platform will attract better tax return which can make a significant difference to the valuation and pricing of such investments.
Q: If exchange platforms like NSE Emerge have to grow, what in your opinion are the critical success factors?
A: With the centre of economic activity and growth moving towards Asia, the stage is set for the SMEs of India to enter the Big league. This SME listing platform will act as the propeller for the SMEs to go to the next level. The success of the SME Exchange depends on effective creation of an alternative ecosystem that is independent of the main board structure and which can cater to the unique needs of small entrepreneurs in raising capital. Quality companies and quality intermediation will be the key determinant of a self -sustainable SME platform.It is healthier for the SME space to evolve at a slower pace on a steadfast quality footing.
Q: How do you see the growth of Digital India build the SME ecosystem, especially new concepts like SME IPO Listing?
A: In the present day, more often than not the survival and growth of the SMEs is dependent on their ability to leverage the wave of the SMAC (Social, Mobile, Analytics and Cloud) technologies.
The good news is that the SMAC technologies are affordable and pervasive. They are now available to businesses of all sizes. This is opening up an opportunity for SMEs to level the playing field and compete with larger players. The need of the hour is for SMEs to take the lead in adopting SMAC and make it an integral part of their business strategies.
Traditionally Indian SMEs have been slow adopters of technology. However, today India has the right demographic contours that boast of a young and energetic entrepreneurial community who are increasingly adopting technology to employ creativity, innovation, and inventiveness to grow their businesses.
While these businesses are poised to grow rapidly, the avenues of risk capital for these new economy sectors, which do not have sufficient assets, is limited. The NSE- EMERGE is well positioned to facilitate their progression by enabling long term financing through market based equity