SMEs – SEBI Initiatives

SEBI: Mandate and Legal Framework

Mandate: Regulatory and Developmental- Protect- Regulate- Promote

Legal Framework - SEBI Act 1992 & Regulations

- Provisions of the Companies Act- Securities Contracts (Regulation) Act 1956 & Rules- Depositories Act, 1996 & Regulations - Appellate Mechanism through SAT

Uniqueness of SEBI Powers

SEBI an exception to ‘Separation of Powers’ doctrine as it performs :- Quasi-Legislative- Quasi-Judicial, and- Quasi-Executive

The Supreme Court observed that “…. The Board exercises its legislative power by making regulations, executive power by administering the regulation framed by it and taking action against any entity violating these regulations and judicial power by adjudicating disputes in the implementation thereof. “ (Clariant International v. SEBI AIR 2004 SC 4236)

Regulatory Domain: Broad Areas

Market infrastructure institutions- Stock Exchanges- Clearing Corporations- Depositories

Market Intermediaries

Investment Vehicles: MFs, CIS, FIIs, AIFs, PMS

Capital raising by companies

Primary market - Resource Mobilization

Type of Issue 2010-11 2011-12 2012-13 2013-14*

No. of issues

Amt. No. of issues

Amt.No. of issues

Amt.No. of issues

Amt.

     

Public Issue58 48,654 35 10,482 33 6,528 35 8672

Rights Issue23 9,503 16 2,375 16 8,944 13 2471

Total81 58,157 51 12,857 49 15,472 48 11143

*Apr 2013 - Feb 2014

(Amount in INR Crores)For the period April 01, 2010 – February 28, 2014

Primary market - Resource Mobilization Break-up for 2010-11 (best year in last 4 years):

Issue Size No. Amt. (INR Cr.)

< 25 cr 6 59

25 - 50 cr 10 409

50-100 cr 19 1313

100-500 cr 24 6875

>500 cr 22 49501

Total 81 58157

SME Sector Performance Both growth and margins of SMEs declining in the face of slowdown

70% of SME companies’ debt is stressed vs. 30% for large and mid-corporates

Working capital cycle of SMEs have stretched to 130 days (vs. 90 days for

mid-corporates) increasing chances of default on working capital borrowing

Financing risks increasing

Alternative source of risk capital in the interest of SMEs as well as financial

stability

Source: HSBC Global Research, February, 2014

SMEs - SEBI Initiatives 1991 - Trading platform for Small companies at OTCEI

• trading in small companies through market makers• considered ahead of time: failed due to lack of participation and

insignificant volumes

2005 - BSE IndoNext segment• Exclusive trading platform for Small companies• Segment could not go beyond the first phase: lack of investor

interest

2008 - Focus on fund-raising needs of SMEs recognised by SEBI:• Discussion Paper seeking suggestions for the regulatory

framework

SMEs - SEBI Initiatives

2009 - MoU u/s 13 of SCRA, between regional and nationwide stock exchanges to facilitate trading in companies listed in regional exchanges

2010 - Separate Exchange/platform for SMEs to make an IPO and get listed in Stock Exchanges (SEs)

2012 - Review of the framework Standardised lot size for offer in IPO and trading thereafter Maximum permissible obligation on market makers

2013 - Direct Listing of securities in institutional trading platform (ITP) of SEs without IPO

SME Platform : Highlights SMEs with post-issue (face value) capital less than INR 10 Cr.: Mandatory listing in SME

platform

SMEs with post issue (face value) capital between INR 10 Cr. to INR 25 Cr. : Listing in either SME platform or main board

Filing and vetting of SME issue with SEs, rather than SEBI

Eligibility: Minimum track record of 3 years for companies

Minimum allottees at 50 (1000 in a normal IPO)

Less stringent continuous listing requirements

Rationalised regulatory and reporting structure (Periodic submissions can be half yearly instead of quarterly)

Abridged annual reports

Exemption from publishing financial results (can make it available in their websites)

SME Platform : Highlights

Mandatory Market Making by Merchant Banker (‘MB’) for 3 years to address liquidity concerns

Market Maker (MM) to have at least 5% of inventory of securities as on date of allotment

MM to give two way quotes till the upper threshold is reached; thereafter, MM to give only sell quotes

Not more than 5 market makers for a scrip

73 Market makers are registered with BSE; 22 with NSE

SME Platform : Highlights

100% Underwriting by MBs• 15% from own account - to ensure that MBs are thoroughly convinced

about the issue quality• Nominated investor viz., QIBs, VCFs etc. enters into agreement with

MB to subscribe • Representative of MB can be on the board of the issuer

Retail investors are ring fenced: minimum market lot of Rs. 1 lakh

SME Platform : Sector-wise Segregation

-Out of the above, 50 companies are listed in BSE and 4 companies are listed in NSE, SME platforms

-Market Capitalization of BSE listed companies > INR 5,000 cr.

Sector Number of Companies Listed

Fund Raised (In Cr.)

Finance 13 116.59Textile 5 39.73Commodity Trading and Distribution

5 64.26

Agriculture Products 4 39.82Construction and Engineering

7 109.2

Others 20 156.78

Total 54 526.38

Listing without IPO

Announcement by FM in budget speech on Feb 28, 2013: “ SMEs, including start-up companies, will be permitted to list on the SME

exchange without being required to make an IPO, but participation will be restricted to informed investors. This will be in addition to the existing SME platform in which listing can be done through an IPO and with wider investor participation"

ITP for SMEs notified by SEBI on Oct 08, 2013 after detailed consultations with various stakeholders

Operational guidelines and continuous listing requirements specified

BSE commenced ITP in February 2014; two listings in BSE ITP

ITP : Salient Features

Envisages eligible SMEs and startups to list in SEs without IPO

Listing Process does not involve an IPO, or private placement or any issue of securities

Upon SE approval for listing, deemed exemption from public offer requirements of SCRR by SEBI

Option to remain listed in ITP upto 10 years

Trading in lots of INR 10 lakh

Exempted from takeover and delisting regulations

ITP : Additional Requirements Investment of INR 50 lakh in equity by any of the following investors:• VCF, AIF, or through an association of angel investors• Registered merchant banker, who has exercised due diligence and invested INR

50 lakh in equity capital. • QIB who has invested in equity capital of INR 50 lakh• Scheduled bank, financing project or working capital requirements• Specialized international multilateral agency or domestic agency (like SIDBI or

NABARD).

Upon listing, SME cannot raise funds through IPO/public issue; private placement and rights issue permitted (without rights to renunciation).

At least 20% of promoters holding to be locked for 3 yrs from listing - to ensure promoters commitment

Corporate governance norms on par with main board companies

Alternative Investment Funds (AIF) Registration under one of the following 3 categories:

• Category I - Venture Capital Funds (including angel funds), SME Funds, Social Venture Funds, Infrastructure Funds

• Category II - private equity funds or debt funds for which no specific incentives or concessions are given by the government or any other Regulator

• Category III - which employs diverse or complex trading strategies and may employ leverage including through investment in derivatives including hedge funds or funds which trade with a view to make short term returns or other open ended funds

AIF - Features

AIF shall not accept an investment of value less than Rs. 1crore

Each scheme of the AIF shall have a minimum corpus of Rs. 20 crore

No scheme of the AIF shall have more than 1000 investors

Category I and II AIFs shall be close-ended and shall have a minimum tenure of 3 years, Category III AIF may be close-ended or open-ended

Units may be listed

AIFs have QIB status

AIF - Angel Funds Angel Funds included in the definition of 'Venture Capital Funds' to

raise funds only from angel investors.

Salient features:Angel Funds shall have a corpus of at least Rs.10 croreMinimum investment by an investor shall be Rs. 25 lakhscontinuing interest by sponsor/manager in the Angel Fund shall be not

less than 2.5% of the corpus or Rs. 50 lakhs, whichever is lesserAngel funds to invest only in venture capital undertakings which are

not more than 3 years old have a turnover not exceeding Rs 25 crore are not promoted, sponsored or related to an Industrial Group whose group

turnover is in excess of Rs. 300 crore and have no family connection with the investors proposing to invest in the company.

AIF – Funds raised Cumulative net figures as at the end of 31st December 2013

(All figures in INR Crores)

Category Number of registered AIFs

Commitments raised Funds raised Investments made

Category I   Infrastructure Fund 8 4945.67 555.08 169.31 Social Venture Fund 3 434.36 78.21 25.3 Venture Capital Fund 13 148.88 66.19 9.16

SME Fund 5 0 0 0

Category I Total 29 5528.91 699.48 203.77

Category II 51 4821.58 1647.95 1222.67

Category III 18 835.87 559.6 477.65

Grand Total 98 11186.36 2907.03 1904.09

Dissemination Board

Dissemination board by NSE and BSE, ready to be launched

Exclusively listed companies of non-operational SEs to be moved to the dissemination board, after the exit of such SEs

Mechanism for willing buyer and seller to disseminate their offers

Exit option to investors

3 companies from Hy. SE to be the first movers to the Board

Thank You!