Listing of Family Run Business on the SME Exchange in India
Listing of Family Run Business on the SME Exchange in India
SME Exchange: An Appropriate Platform for Family Business to Raise capital in India.
Family-run businesses are the backbone of the Indian economy and employers to millions of people, have a huge potential to grow. The SME Exchange is an appropriate platform of raise capital for such high growth potential businesses.
?With the immense potential of growth that most SME and family run businesses have in the coming decade, the biggest problem faced is access to appropriate timely availability of capital. With the emphasis of banks on collateral based lending, capital in form of equity is of essence for growth. The SME exchanges in India are an appropriate platform to raise this much needed equity growth capital.
?The BSE SME exchange is leading the way in India in unleashing the growth potential for family-run businesses and SMEs in the last 10 years. With 400 companies listed on the BSE SME exchange of which 150 companies migrated to the Main Board of the stock exchange. With a market capitalization in excess of INR 58,000 crores and total amount raised in excess of INR 4,000 crores, family business should explore the listing option to raise growth capital to tap the appropriate growth opportunities.
The first step that a company needs to undertake is to appoint a Merchant Banker who helps and guides the company in the complete listing process. A Merchant Banker is an intermediary approved by SEBI that helps companies tap the capital market. The process starts with conducting a due diligence by the Merchant Banker, post which a DRHP (Draft Red Herring Prospectus) is prepared after conducting due diligence regarding the company i.e. checking the documentation including all the financial documents, material contracts, Government approvals, promoter details etc. and planning the IPO structure, share issuances and financial requirements.
?An SME Exchange is a stock exchange dedicated for trading the shares/ securities of SMEs who otherwise find it difficult to get listed on the Main Board. The concept originated from the difficulties faced by SMEs in gaining visibility and attracting sufficient trading volumes when listed alongwith other stocks on the Main Board of Stock Exchanges. World over dedicated SME trading platforms or exchanges are prevalent, which are known by different names such as 'Alternative Investment Markets' or 'Growth Enterprise Market', 'SME Board' etc. Some of the known markets for SMEs are AIM (Alternative Investment Market) in UK, TSX Venture Exchange in Canada, GEM (Growth Enterprise Market) in Hong Kong, MOTHERS (Market of the high-growth and emerging stocks) in Japan, Catalist in Singapore and the latest initiative in China-ChiNext. As a matter of fact, NASDAQ also started as an SME exchange.
?Eligibility Criteria
?The Company shall be incorporated under the Companies Act, 1956 / 2013.
Financials
?·??????Post Issue Paid-up Capital
?The post issue paid up capital of the company (face value) shall not be more than INR 25 crores.
?·??????Net worth
?Positive net worth
?·??????Tangible Asset
?Net Tangible Assets should be of INR 1.5 crores.
?·??????Track Record
?The company or the partnership/proprietorship/LLP Firm or the firm which have been converted into the company should have combined track record of atleast 3 years.
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?Or
?In case it has not completed its operation for three years then the company/partnership/proprietorship/LLP should have been funded by Banks or financial institutions or Central or State Government or the group company should be listed for atleast two years either on the Main Board or SME board of the Exchange.
?The company or the firm which have been converted into the company should have combined positive cash accruals (earnings before depreciation and tax) in any of the year out of last three years and its net worth should be positive.
?Benefits of SME Listing
?·??????Access to Capital
?With the Indian economy poised to grow at double digits in years to come and marching towards a USD 5 trillion economy and focus of the Government on helping and growing SME companies, the opportunities for growth for SME and family-run businesses is very high. The only constrain to super normal growth that most small business face is timely access to capital. With the constrains faced in terms of the collateral based system of lending of the banking system in India, access to equity funding is a must for overall growth of the company. The SME exchange provides a platform for appropriate funding.
?·??????Enhanced Visibility and Prestige
?The biggest aspect of a family-run business is the reputation, prestige and pride of the family members running the business across generations. In most cases the business is known in the city in which they operate or the state in which they are present depending upon the overall size of the business. Once listed on the stock exchange, which has a nationwide reach in terms of investors as well as brokers, the company is known at a national scale and thereby enhancing the overall visibility of the promoter family.
?·??????Attain Appropriate Business Valuation
?Valuation for most family-run businesses is valuation of the land and building. This is mainly for getting appropriate credit from the banks in India, wherein the loan amount depends upon valuation of the asset given as a security and as a secondary collateral. Once listed the share is traded on the SME exchange and thereby the valuation of the company will depend upon the financial performance of the company. If the company is doing very well and has a healthy order book and outlook, the share prices will go up. Over the last 10 years many companies listed in the SME exchange have given multifold returns due to the strong performance of the company.?
?·??????Liquidity and Exit for Friends and Family
?Most family business is built of capital that is taken from close friends and family; the people that have trusted the promoters at a very early stage. When the company grows and becomes large, when the company is unlisted it becomes extremely difficult for the promoters to provide an exit to such investors. Once listed a partial or complete exit can be provided to such friends and family that have invested at a very early stage.
?·??????Attract Talent
?One of the biggest problems faced by most family business is attracting the right kind of talent. Once listed on the stock exchange, it gives the company appropriate visibility and growth prospects, wherein an appropriate ESOP scheme can be structured for the present and future employees to attract the right kind of talent.
?·??????Appropriate Corporate Governance Standards
?One of the biggest change that is required in a family business when it attains growth, is the standard of corporate governance. The attitude of owner knows it all and whatever he/she says is correct leads to an environment which is not congenial for growth. Once listed when the company has an appropriate Board of Directors and possibly a family council, it leads to a far better level of corporate governance resulting in growth for the company.
?The SME exchange is the apt platform for most family-run business to raise capital, with relaxed listing norms and disclosers on getting listed. In these turbulent times the SME exchange is an apt platform to raise growth capital.
?_Dr. Farzan Ghadially.