Have you ever wondered about investing in start-ups, more specifically a stock that will give you multifold returns? Here, we are not talking about investing in venture capital or private-equity funds, which generally invest in many early-stage companies out of the belief that at least one of them will give terrific returns. Instead, our focus is on companies that are listed in an SME Exchange.
What is an SME exchange?
A company has to meet some criteria laid down by the SEBI to get its shares listed on a regular stock exchange. These include having an operating profit of Rs 15 crore in the last three years, the minimum post-issue market cap of at least Rs 25 crore, etc. But over a period of time, the need to allow even smaller/younger companies to raise money from the public through the capital markets was felt. Thus, such companies, referred to as SMEs (small and medium enterprises) were allowed to raise capital in a separate trading platform, wherein the entry barriers would be lower. This trading platform is called an SME exchange.
Interestingly, it is not a separate exchange like the BSE or NSE. Instead, it is a separate trading platform within the main stock exchanges, where shares of SMEs are traded. So, the name, SME exchange, is a bit misleading.
Since the BSE and NSE operate SME exchanges (called BSE SME and NSE Emerge, respectively), investors who can transact stocks in regular exchanges can automatically purchase shares in SME exchanges.
Difference between SME and regular exchanges
An SME exchange and a regular stock exchange broadly differ on two things – requirements for the listed entity and investors’ characteristics. In order to pave the way for a wide range of SMEs to get listed, the SEBI has eased regulatory requirements, such as a lower minimum paid-up capital (Rs 1 crore), fewer number of allottees, etc. Besides, post listing, there are fewer compliance requirements that companies need to adhere to.
On the other hand, when it comes to investors, the SEBI has adopted a very cautious regulatory approach wherein it has tried to encourage only high net-worth investors (who tend to have a larger risk appetite) to invest in companies listed on the SME board. So, potential investors, during the Initial Public Offering (IPO), need to apply for shares worth at least Rs 1 lakh and even investors in the secondary market need to buy shares worth at least around Rs 1.5 lakh. Hence, small-time investors are prevented from investing in these risky companies.
6 Benefits of Listing on SME Exchange
Listing on SME Exchanges has the following key advantages:
Firstly, it provides access to capital by equity infusion which is a direct growth driver. The funds so raised are company’s own and the company is at complete liberty to utilize it for any purpose such as expansion, diversification, acquisition or even loan repayment, all of which leads to a healthy balance sheet. Once listed, these companies are now well equipped to exploit other avenues of raising capital such as rights issue, preferential issues, qualified institutions placements (QIP) and other international fund raising instruments, such as FCCBs, ADRs and GDRs etc. Banks and financial institutions also prefer to extend finance to listed companies as against unlisted ones.
Secondly, it simultaneously provides a convenient exit route to private equity investors, stock option holding employees and other investors, by providing liquidity to these shareholders and maximizing value. Liquidity in shares also enables the existing shareholders to trade in their own shares leading to better valuation than through private transactions.
Thirdly, a major reform lead by listing is good governance. Benefits accrue at the time of listing as the companies prepare themselves for this event and also throughout the life of the company. Regulatory supervision and governance controls in the form of routine compliances become a part of the company’s day-to-day existence. Timely disclosure of material information not only leads to improved governance but also protects investors’ interest.
Fourthly, listing on an SME Exchange enhances the visibility of these companies, which would otherwise be lacking due to little or no exposure. As a listed entity, these companies now have a real platform to showcase themselves, helping them deal directly with their competitors and simultaneously getting the opportunity to market themselves, thereby creating business opportunities. Listing leads to enhanced public awareness due to media coverage and publicly available information; this leads to improved credibility of these companies.
Fifthly, the sale of listed securities attracts short term capital gains tax of only 15% and a long term capital gains of only 10%, making it tax efficient as well, as against sale of shares of an unlisted company, which attracts tax of 30% short term capital gains and 20% long term capital gains.
Lastly, a striking feature of listing on an SME Exchange is the advantage of seamlessly migrating to the main board, i.e. the BSE or the NSE. If the paid-up capital of the company exceeds Rs.10 crores and is up to Rs.25 crores, a company may transit to the main board.