Should SME Companies in India Consider Listing on the Stock Exchange

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While researching this article, I realized that this topic is aligned with UN SDG Goal 9.3.

“Increase the access of small industrial and other enterprises, particularly in developing countries, to financial services, including affordable credit, and their integration into value chains and markets”

Of course, the MSME sector is consistent with several of the 17 SDGs.

On June 27, we commemorated the 5th anniversary of the United Nations MSME Day. Our economies are heavily dependent on small businesses. They represent more than 70% of all businesses and more than 50% of all jobs in the world.

In India, MSMEs contribute around 30% to India’s GDP, account for almost 40% of total exports and employ around 11 million people; more than half of them are located in rural India. India has over 7.9 million MSMEs.

Considering the economic importance of this sector, the Indian government has always provided wholehearted support. We have a separate Ministry of MSMEs and its budget has been increased from Rs. 15,700 crores in 2021-22 to Rs 21,422 crores in 2022-23.

In 2006, the Micro, Small and Medium Enterprise Development (MSMED) Act was enacted. This status aimed to integrate all the various industries, the service sector and medium-sized enterprises. The MSME sector in India is therefore classified into three categories: micro, small and medium.

A micro enterprise, where the investment in plant and machinery or equipment does not exceed one crore rupees and the turnover does not exceed five crore rupees.

A small business, where the investment in plant and machinery or equipment does not exceed ten crore rupees and the turnover does not exceed fifty crore rupees.

A medium enterprise, where the investment in plant and machinery or equipment does not exceed fifty crore rupees and the turnover does not exceed two hundred and fifty crore rupees.

The breakdown between micro small and medium as per Udhyam record as of 31 2021 is as below.

The micro-sector, with 60.6 lakh estimated enterprises, accounts for over 87% of the total estimated number of MSMEs. The small sector with 8.1 lakh and 34,090 medium sector enterprises accounted for 11% and 0.5% of the total estimated MSMEs. The service sector represents 68% and the manufacturing sector 32%.

Listing on the stock exchange is really only an option for the 34,090 mid-sector companies in India, but it gives small companies in the sector inspiration to grow. For the outlook at 7462, India has the largest number of listed companies in the world and their market capitalization is equal to the country’s GDP.

I have mentored several companies in this sector and have come to realize that there is an appetite for equity, but also apprehensions, misunderstanding and general apprehension. The purpose of this article is to shed some light on this important topic.

Funding for startups and venture capital

Most startups are also MSMEs, but they are a separate category. Startups are by definition next-generation, ambitious, innovative, technology-driven companies with strong founding teams and highly scalable business models. India has the third largest startup ecosystem in the world after the United States and China and enjoys strong government support. There are 73,000 DPIIT registered startups to date and 106 unicorns. Startups are a favorite hunting ground for VCs. Last year, venture capital funding in India hit a record high of US$38.5 billion.

Venture capital firms play an important role in providing a growth pipeline for companies. However, traditional SMEs are not able to access this important source of venture capital which is of great importance in the early stages of business growth. It should be noted that the VC also needs an exit route which is provided at the time of the IPO to institutional and retail investors. However, several high-profile IPOs of VC-funded startups like Zomato and Paytm have sparked controversy.

Fortunately, the government recognized the need to provide venture capital for the growth of traditional SMEs and set up a corpus of Rs 10,000 crore for a fund of funds called Self Reliant India (SRI) Fund implemented by a vehicle to special purpose, NSIC Venture Capital Fund Limited. , which is a wholly owned subsidiary of the National Small Industries Corporation. To date, SRIF has provided Rs 1,600 crore of financing to 88 MSMEs in the country. What is very interesting is the catalytic approach taken by the government, which is best explained by this recent statement by Shri BB Swain, Secretary of the Ministry of MSMEs.

“MSMEs are not known to be equity-seeking. But this regime (SRI Fund) has begun to promote it. Our aim was that if we (the government) contributed one rupee, the private sector would contribute four rupees for equity participation in MSMEs. The first batch of 88 MSMEs were funded and we invested around Rs 200 crore and the private sector invested Rs 1400 crore. This shows that there is enough money available for those with talent and MSMEs that are doing well. The private sector contributes seven rupees for every rupee invested by the government.

Why do SMEs fear venture capital?

There is no doubt that SMEs need access to venture capital to grow. However, their traditional mindset often makes them reluctant to access venture capital. Some of the common problems are

  • Fear of interference in management by investors
  • Redemption risk
  • Reluctance to disclose information and embrace transparency
  • Reluctance to hire and delegate professional managers
  • Unconscious
  • Lack of vision and appetite for growth

Most of these concerns are internal to the entrepreneur. However, in my experience, the awareness and aspirations of the next generation of entrepreneurs are inspiring and offer great hope that things will change for the better. As McKinsey Global CEO Bob Sternfels recently said, this will be India’s century. Even in family businesses, change is led by the next generation.

Quotation options for SMEs

Once an SME reaches a certain size and has a demonstrable track record, it can approach the stock market. This option is also important for previous investors in the company as it will allow them to exit.

The SEBI standards for listing on NSE and BSE are very strict and can be daunting and out of reach for a normal mid-sized company. Fortunately, like in many other countries in India, SEBI also allows specialized platforms for SMEs with much simpler listing standards and NSE and BSE have been providing this service since 2012.

In total, more than 595 companies have been listed on these exchanges and have raised Rs 7,300 crores and have a market capitalization of Rs 79,000 crores. BSE SME and NSE EMERGE are the names of these platforms. Among these SMEs, BSE is more popular.

It should be noted that post-listing on the SME exchange both NSE and BSE provides the opportunity to switch to the main exchange at the appropriate time. 225 companies have already exercised this option.

SEBI Standards for IPO on Main Exchange VS SME Exchange

Steps in the IPO process for an SME

The IPO process is easier for SMEs compared to the main IPO. But it remains a complex and time-consuming process. It takes at least 4 months from the day the company appoints an investment banker.

  • Appointment of an investment banker
  • Capital structuring, due diligence and pre-IPO preparation
  • Appointment of bankers, registrar, market makers, RTA, etc.
  • Preparation of the Offer Document (DRHP)
  • Filing of the DRHP with the Stock Exchange
  • Exchange and RoC Approval
  • Emission Pricing
  • The opening of the public issue
  • Closing of the Issue & Allocation of Shares
  • Listing and trading on the stock exchange

Final comment

The traditional constraints of land, labor and capital are no longer valid. Today, the world belongs to those who have the ability to dream big and the perseverance to achieve those dreams.

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