Background
Earlier this week, SEBI issued the Securities
and Exchange Board of India (Listing of Specified Securities on Institutional
Trading Platform) Regulations, 2013 (the Regulations), which
enables small and medium enterprises (SMEs) to list on the stock exchanges
without going through an initial public offering (IPO).
and Exchange Board of India (Listing of Specified Securities on Institutional
Trading Platform) Regulations, 2013 (the Regulations), which
enables small and medium enterprises (SMEs) to list on the stock exchanges
without going through an initial public offering (IPO).
This represents another step in creating special avenues for
SMEs to raise capital and to provide their shareholders with liquidity as well
as exit mechanisms. Although efforts have been taken previously (as discussed here
and here)
to kick-start a separate capital markets regime for SMEs, it does not appear to
have met with much success.
SMEs to raise capital and to provide their shareholders with liquidity as well
as exit mechanisms. Although efforts have been taken previously (as discussed here
and here)
to kick-start a separate capital markets regime for SMEs, it does not appear to
have met with much success.
Requirements
Under the Regulations, a separate institutional trading
platform is available in an SME exchange for listing and trading of specified
securities of SMEs for informed investors. Such listing may be availed of
without going through a public offering process. In other words, this provides
exit options to investors even where the company or the promoters do not
require additional capital to be raised from the public.
platform is available in an SME exchange for listing and trading of specified
securities of SMEs for informed investors. Such listing may be availed of
without going through a public offering process. In other words, this provides
exit options to investors even where the company or the promoters do not
require additional capital to be raised from the public.
This facility is available to SMEs that meet certain
conditions, as follows:
conditions, as follows:
(i) There
are certain positive qualifications to be satisfied. For example, the company
must be truly an SME judged by parameters such as revenues and paid up capital.
Hence, the facility is available to companies that have completed not more than
10 years after incorporation and where their revenues have not exceeded Rs. 100
crores in any of the previous financial years. Moreover, the paid up capital of
the company must not have exceeded Rs. 25 crores in any of the previous
financial years.
are certain positive qualifications to be satisfied. For example, the company
must be truly an SME judged by parameters such as revenues and paid up capital.
Hence, the facility is available to companies that have completed not more than
10 years after incorporation and where their revenues have not exceeded Rs. 100
crores in any of the previous financial years. Moreover, the paid up capital of
the company must not have exceeded Rs. 25 crores in any of the previous
financial years.
(ii) The company must have a credible supporter who has a financial
stake in it. This can include an alternative investment fund, angel investor,
project financier, merchant banker, qualified institutional buyer or the like
who has taken at least a certain financial stake (in equity or debt, as
appropriate) in the company as prescribed in the Regulations.
stake in it. This can include an alternative investment fund, angel investor,
project financier, merchant banker, qualified institutional buyer or the like
who has taken at least a certain financial stake (in equity or debt, as
appropriate) in the company as prescribed in the Regulations.
(iii) There are certain disqualification requirements, in the sense
that the company should not be subject to certain circumstances such as winding
up, labeling as a willful defaulter, or the subject of a regulatory action
under relevant legislation.
that the company should not be subject to certain circumstances such as winding
up, labeling as a willful defaulter, or the subject of a regulatory action
under relevant legislation.
Although there is no IPO requirement, the process of listing
necessitates appropriate disclosures. Hence, the company is required to prepare
an information document containing prescribed disclosures, which must be hosted
on the website of the recognised stock exchange. These disclosures appear far
less onerous compared to those in an IPO. Also, the information document is not
required to be filed in draft form before SEBI for its comments. Hence, the
listing is largely a private process with limited regulatory involvement,
except on the part of the stock exchange. At the same time, the information
document is subject to the customary liability provisions of the Companies Act
and relevant SEBI regulations in case of any misstatement.
necessitates appropriate disclosures. Hence, the company is required to prepare
an information document containing prescribed disclosures, which must be hosted
on the website of the recognised stock exchange. These disclosures appear far
less onerous compared to those in an IPO. Also, the information document is not
required to be filed in draft form before SEBI for its comments. Hence, the
listing is largely a private process with limited regulatory involvement,
except on the part of the stock exchange. At the same time, the information
document is subject to the customary liability provisions of the Companies Act
and relevant SEBI regulations in case of any misstatement.
There is also a minimum promoter lock-in of 20% shares for a
3-year period.
3-year period.
The institutional trading platform appears to be structured
as a temporary measure rather than a longer-term liquidity solution for SMEs.
While the company is always free to exit the platform through a special
resolution of its shareholders where 90% of the total votes and a majority of
non-promoter votes have been cast in favour of an exit, the company would be
forced to exit in certain circumstances. These include upon the expiry of a 10-year
period from listing, or if the company has a paid-up capital, revenues or
market capitalisation beyond prescribed limits. In other words, if the company
ceases to be an SME in fact, then the institutional platform is no longer
available.
as a temporary measure rather than a longer-term liquidity solution for SMEs.
While the company is always free to exit the platform through a special
resolution of its shareholders where 90% of the total votes and a majority of
non-promoter votes have been cast in favour of an exit, the company would be
forced to exit in certain circumstances. These include upon the expiry of a 10-year
period from listing, or if the company has a paid-up capital, revenues or
market capitalisation beyond prescribed limits. In other words, if the company
ceases to be an SME in fact, then the institutional platform is no longer
available.
From the investors’ perspective, the institutional trading
platform is being made available only to large investors, on the assumption
that they will be sophisticated and informed with the required wherewithal to
bear the risk of investing in a company without appropriate disclosures such as
a full-blown prospectus. This is ensured through a numerical materiality test,
which is that the minimum lot for investment in the platform is Rs. 10 lakhs.
platform is being made available only to large investors, on the assumption
that they will be sophisticated and informed with the required wherewithal to
bear the risk of investing in a company without appropriate disclosures such as
a full-blown prospectus. This is ensured through a numerical materiality test,
which is that the minimum lot for investment in the platform is Rs. 10 lakhs.
Analysis
The Regulations are timely in that they provide an exit
opportunity to investors in SMEs. This may in turn help capital raising by SMEs
on better terms. It may also have an overall impact on the economy as the SMEs
play an important role in growth and productivity. However, it remains to be
seen whether the SME and investor communities will adopt this route in line
with the regulatory expectations.
opportunity to investors in SMEs. This may in turn help capital raising by SMEs
on better terms. It may also have an overall impact on the economy as the SMEs
play an important role in growth and productivity. However, it remains to be
seen whether the SME and investor communities will adopt this route in line
with the regulatory expectations.
In terms of international parallels, the
Jumpstart Our Business Start-ups Act (JOBS Act) in the US (discussed here)
perhaps comes closest, whereby that legislation allows emerging companies to
list on the stock market without complying with detailed (and possibly
stifling) regulation. Companies such as Twitter have taken
advantage of that legislation in undertaking a listing of their securities.