One of the principal challenges of small & medium enterprises whether in India or anywhere else in the world has perennially been finance. Apart from friends and family, typically MSMEs rely heavily of private money lenders and the unorganised financial markets for their finance needs. Needless to say, the cost of finance from such sources is high which either hampers them from going the full length with their business growth plans or it ends up reducing their profitability.
Majority of Banks and NBFCs today offer SME loans and they have been making good progress in fulfilling the finance needs of MSMEs. However the approach followed by banks to funding may to many be restrictive and not be easy, as in any loan process, a Bank has to evaluate the risks involved, demand collateral support so as to mitigate and manage risks. Many a times an entrepreneur fails to meet all the terms and conditions which the Bank might pose.
Capital market financing
Amongst all alternative sources of funding to provide access to SME finance including new digital marketplace concepts like P2P lending, the one that definitely stands tall is capital market financing. Stock exchanges play an important role in the financing ecosystem though markets in different jurisdictions have variable levels of success in developing a viable market for SME funding. A number of exchanges, in both emerging and developed markets have dedicated SME markets within the exchange group.
Benefits to SMEs through listing on exchanges
Listing of a company on the exchange gives better valuation to the company. The debt and equity ratios will improve and the balance sheet starts looking much healthier. The company’s visibility also gets enhanced with coverage from analysts and media that goes on to help image building of the SME. Listing also empowers companies who wish to make use of ESOPs and other stock base compensation plans as a tool to reward and retain their employees. It encourages innovation and entrepreneurial spirit, much required from the perspective of Indian national economy. Listed SMEs also have easy accessibility to alternate funding options. The banks Private Equity Funds and other Financial Institutions provide loan easily. Also, the Company can raise more funds through follow-on public offerings.
The tax benefits of SME exchange listings are also immense. Unlisted shares attract short term capital gains tax of upto 30% and long term capital gains tax of 20% after indexation. Whereas, in the case of listed securities the rates of short term and long term capital gains tax are 15% and nil respectively.
Investors’ Profile
Typically, retail investors tend to have a majority share of the SME market though they may mostly be High Net Worth individuals. The initial investors in public offers tend to be individuals who know the companies because they are from the same region or are involved in the companies in some way (vendors or customers of the company). Over time, as the company progresses it starts attracting institutional investors as they would have a ready, transparent and tax efficient exit route.
Cost Structures
Internationally, exchanges adopt a tiered listing fee structure (both initial and ongoing) based on the market capitalization of the firm. There is in some cases also a built-in “discount” for smaller-sized firms (the smaller the company, the less they pay). Many exchanges go further and offer additional discounts for listings on the SME market.
