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.
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.
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.
Global Benchmark SME platform – London Stock Exchange – AIM
AIM (Alternate Investment Market) is the London Stock Exchange’s international market for smaller growing companies. A wide range of businesses including early stage, venture capital backed as well as more established companies join AIM seeking access to growth capital. AIM offers smaller growing companies the benefits of a world-class public market within a regulatory environment designed specifically to meet their needs.
Since its launch in 1995, over 3,600 companies from across the globe have chosen to join AIM. Powering the companies of tomorrow, AIM continues to help smaller and growing companies raise the capital they need for expansion. AIM is supported by a wide community of experienced advisers, ranging from brokers to accountants, lawyers and public relations and investor relations firms.
BSE SME – India’s leading SME Bourse
The Bombay Stock Exchange (BSE) established its SME Platform in 2012 after the Securities and Exchange Board of India (SEBI) – the market regulator – introduced regulatory changes providing for differentiated listings requirements for SMEs. In regulatory terms, the SME platform is distinct from the main board though it is not licensed as a separate exchange. SEBI remains the primary regulator of the market and determines many of the requirements for the market.
127 small and medium enterprises have got listed on the BSE SME platform and have raised Rs 937 crore from the market. Khemani Distributors & Marketing has become the 127th company to get listed on the BSE SME Platform on March 30, 2016. The total market capitalisation of these 127 companies as on March 31, 2016 stood at Rs 9331.25 crore, a BSE statement said.
Critical Success Factors for SME Exchanges
Ability to identify and purposefully engage with SMEs that have a fairly impressive growth rate with a potential capital demand is the key. They have to be hand held and it is in the interest of all that exchanges has to enable building a network of advisors that vet issuers and provide comfort to investors about the quality of the issue. To be most effective, these advisors should be licensed, regulated, and sanctioned if they support too many ultimately poorly performing issuers.
Ongoing outreach and SME Awareness building campaigns will be the other critical factors for the success of the concept of raising finance through the IPO route. Apart from SME education ground events, one has to leverage the power of digital media to reach out SMEs in their own backyard in the language of choice to amplify and enhance the impact of any SME Finance education initiative. This is where exchanges and digital media platforms will need to collaborate to build the SME Exchange ecosystem to enable and empower SMEs take the next big leap.