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The SME Platform - A Few Concerns

Monday, June 11, 2018
By Clifton Desilva

Clifton Desilva, Director, Altina Securities

The SME segment is a very critical part of the Indian economy. Besides the fact that it is important from the point of view of employment and exports it assumes significance in the light of the ‘make in India’ campaign launched by the government.

The small and medium enterprises (SME’s) play a crucial role in the socio-economic growth story of India and being the primary drivers of India’s growth story the sector is expected to contribute significantly to the domestic output in the years ahead. Also for a country like India where employment of the masses is the need of the hour the SME sector could be first choice as this sector provides employment to 40% of the workforce. According to the 2013 survey by the National sample survey organization there are 57.7 million small business units mostly individual proprietorship which run manufacturing, trading or services activities. In the sector 70% is represented by agriculture and 30% by manufacturing and services. The MSME Sector is the largest generator of employment in the Indian economy. It forms a major portion of the industrial activity with a contribution of 90%

SMEs considering their size have limited financial resources .Most companies that are in the growth phase tend to over borrow and banks are not willing to provide further credit and they eventually become cash strapped. Equity is then necessary to bring back strength to the balance sheet. The SME platform which was set up in 2012 is a boon to entrepreneurs to take advantage of the ease of listing as well as compliance to scale up their companies.

Taking advantage of the platform in a short period of time already 252 companies have got listed on the BSE SME platform and 154 companies on the NSE SME platform taking the total to 406 companies. However there are certain issues if addressed could result in a faster growth of the platform.

The ceiling on post issue paid up capital appears to emerge as a major challenge. Currently the ceiling for listing on the SME Platform is Rs 25 crore. With the platform witnessing exponential growth the size of IPOs also keep increasing. The average issue size has seen a huge scale up over the years. There are several midsized companies that appear keen to tap the SME Platform having paid up capital in excess of Rs 25 crore and therefore do not qualify for listing on the SME Platform and at the same time do not command the valuation of a typical main board issue.

There are many companies with paid up capital ranging between Rs 26 crore to Rs35 crore but with profits between Rs 5 to 10 crore. These companies unfortunately do not qualify for listing on both the platforms i.e. the SME platform since their capital is more than Rs 25 crore and on the main board since their profits are less than Rs 15 crore.

Even companies with a lower capital of around Rs 20 crore may not find it feasible to explore the SME platform as their post issue capital would be close to the ceiling capital of Rs 25 crore and it would be difficult to raise further capital unless they migrate to the main board .

Another area of concern is the consideration of track record of company converted from non corporate entity like proprietorship. The benefit available for partnership firms for track record is not available to proprietorship firms that corporatize their business. This is a negative and discourages these companies from taping the capital market .The SME space in India is primarily dominated by proprietorship firms. Quite a large number of sole proprietorship are unable to take advantage of listing. Proprietorships could avail the benefit of the SME capital market if the benefit of track record can be extended to them.

SME IPOs by definition are of small size and brought at relatively lower valuations considering the fact that most companies are in emerging stage and are unknown to investors. The promoters are required to dilute at least 25% of their equity through initial public offer (IPO) and maintain the minimum public shareholding on a continuous basis. These companies require growth capital at various stages post IPO and having diluted 25%, further dilution causes concerns as it would further dilute the promoters holding thus limiting the ability to raise further capital for growth. Therefore a promoter has to focus on striking a balance between funding and ownership pattern. A low promoter holding would reduce investor confidence.

At present to comply with the minimum size promoters are compelled to dilute 25% of post issue capital even though they may not be in need of immediate funds of that magnitude. This indeed discourages many progressive companies from tapping the SME Platform.

Also now the minimum size of investment on the SME Platform is Rs 1, 00,000 and therefore restricts retail participation. The argument for the minimum investment size was to restrict the platform to high net worth and informed investors. Now that over the years the platform has matured, a scale down in the minimum lot size from Rs 1, 00, 00 to Rs 50, 0000 would encourage more retail participation.

For e.g. – The stock price of Cerebra Integrated Technologies on the BSE ( main board) is quoting around Rs 58 and the market lot is 1 , therefore the minimum investment is Rs 58. On the other hand the stock price of Dhruv Consultancy Services on the BSE SME Platform is quoting around Rs 54 and the minimum lot is 4000 and therefore the minimum investment is Rs 1.08,000. On the Main Board the lot size is based on unit (no of share and not value) whereas on the SME Platform the lot size is based on value.

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