SMEs Financing through Capital Market and related issues

Pavan Kumar Vijay Managing Director

Definition of SMEs
There are various type of small enterprises:

Manufacturing A micro enterprise : Where the investment in plant and machinery does not exceed 25 lakh rupees; A small enterprise: Where the investment in plant and machinery is more than 25 lakh rupees but does not exceed 5 crore rupees; A medium enterprise: Where the investment in plant and machinery is more than 5 crore rupees but does not exceed 10 crore rupees; Services A micro enterprise : Where the investment in plant and machinery does not exceed 10 lakh rupees; A small enterprise: Where the investment in plant and machinery is more than 10 lakh rupees but does not exceed 2 crore rupees; A medium enterprise: Where the investment in plant and machinery is more than 2 crore rupees but does not exceed 5 crore rupees

Contribution of SMEs in Indian Economy

Industrial Output

45% 40%

Indian SME Market Value $ 5 billion

Exports Industrial Units Employment Products

95% 42 Million (4 times higher than large enterprise)

More than 8000

Industries where SMEs have made remarkable progress:

Manufacturing

Precision Engineering

Food Processing

Agro

Service sectors

Pharmaceuticals

IT

Retail

Textile & Garments

Features of SMEs
SMEs are started by one or two person with their own funds.

SMEs generally begins because the founder/owner has a particular technical

expertise
SMEs are engaged in innovative and technology driven areas.. SMEs majorly operate on trust, rather than on systems and contracts. SMEs have a tight family-like culture where the values of the owner are strongly

shared by the staff and workplace practices are flexible and suited to individual employees' needs
SMEs are not aware of the regulations to which it is expected to adhere.

Problems faced by SMEs

Absence of adequate and timely finance

Limited knowledge and non-availability of suitable

Low production capacity Ineffective marketing and identification of new markets Constraints on modernization and expansions

technology

FINANCING GAP

Non availability of highly skilled labour at affordable cost Follow up with various agencies in solving regular activities Lack of interaction with government agencies on various matters.

Reasons for SMEs financing Gap

An incomplete range of financial products and services Gaps in the legal framework . Lack of information on both the banks and the SMEs side. Lack of sufficient collateral. A Substantial risk of loss . Increased interest rates for SMEs to cover up increased risk, which make bank

financing difficult for SMEs

More volatile pattern of growth and earnings, with greater fluctuations . Low survival rate. Difficulty to distinguish the business / financials of the company from that of its

owners.

FINANCING THROUGH CAPITAL MARKET

SME Capital Market Framework Past scenario

Over the Counter Exchange of India (OTCEI)

A platform for small businesses with a capital base as low as Rs. 30 lakhs, to raise money from the public. The rolling settlement system, the depository, an electronic trading network or a short settlement period, all these were first introduced into the Indian market by the OTCEI. There was a problem in finding listings of good, sound companies that would have been a favourable advertisement for the Exchange. OTCEI was also established as an ideal one for technology companies and start-ups. However, it failed to attract the better technology IPOs. OTCEI today has very few active trading members. A large section comprise also members of either the NSE or the BSE.

SME Capital Market Framework Bridging the Gap

(Decisions taken in SEBI Board Meeting dated November 9, 2009)
SMEs exempt from eligibility norm applicable for IPOs and FPOs under SEBI (ICDR)

Regulations, 2009

IPO/FPO norms under ICDR: Net tangible assets of at least Rs. 3 cr. in each of the preceding 3 full years, A track record of distributable profits for at least 3 out of immediately preceding 5 years and a net worth of at least Rs. 1 cr. in each of the preceding 3 years Aggregate size of proposed issue and previous issues in the same FY does not exceed five times its pre-issue net worth. OR the issue is made through the book building process, or at least fifteen per cent. of the cost of the project is contributed by scheduled commercial banks or public financial institutions, and the minimum post-issue face value capital of the issuer is ten crore rupees, or market-making for at least two years

SME Capital Market Framework

(Decisions taken in SEBI Board Meeting dated November 9, 2009)

For SMEs Minimum IPO Application Size of Rs. 1 Lakh Minimum trading Lot is Rs. 1 Lakh No minimum paid up capital requirement for listing on SMEs platform.

For other Companies Minimum application value is Rs. 5000-7000. Minimum trading Lot is 1 Equity share Minimum paid up capital of Rs. 3 Cr. is required for listing on BSE and Rs. 10 Cr. for listing on NSE. No maximum paid up capital limit

Maximum paid up capital limit is Rs. 25 Cr.

SME Capital Market Framework

(Decisions taken in SEBI Board Meeting dated November 9, 2009)

For SMEs

For other companies

Offer document to be filed with SEBI and the stock exchange. However, no observation will be issued by SEBI.

Offer document to be filed with SEBI and the stock exchange for a minimum period of 30 days in which SEBI may issue its observations. No mandatory market making requirement except in certain circumstances.

Compulsory Market Making for a minimum period of three year. During complusory Market Making promoters / acquirers can not dilute their shareholding to Market Maker.

SME Capital Market Framework

(Decisions taken in SEBI Board Meeting dated November 9, 2009)

For SMEs

For other companies

SEBI (SAST) Regulations, 1997 will not be applicable to market maker.

SEBI (SAST) Regulations, 1997 does not apply to registered Market Maker for acquisition of shares in the ordinary course of business. Mandatory underwriting of 100% of net offer to public in case bookbuilding issue. No requirement in case of fixed price issue.

Mandatory underwriting of 100% of the issue size

SME Capital Market Framework

(Decisions taken in SEBI Board Meeting dated November 9, 2009)

For SMEs

For other Companies

Minimum 15% mandatory underwriting by Merchant Banker

Minimum 5% mandatory underwriting by Merchant Banker, if the issue is underwritten.

Minimum number of allottees in IPO shall be 50

Preparation and submission of financial results to the stock exchanges on Half-yearly basis.

Minimum number of allottees in IPO shall be 1000.

Preparation and submission of financial results to the stock exchanges on Quarterly basis.

Need to develop SME Sector

If SME sector has to be developed, the major reforms are required in banking system as well as capital market to provide timely and cost-effective financing solutions to this enterprises to develop their business idea.

Thank You