Earlier this week, SEBI issued the Securities and Exchange Board of India (Listing of Specified Securities on Institutional Trading Platform) Regulations, 2013 (the Regulations), which enables small and medium enterprises (SMEs) to list on the stock exchanges without going through an initial public offering (IPO).
This represents another step in creating special avenues for SMEs to raise capital and to provide their shareholders with liquidity as well as exit mechanisms. Although efforts have been taken previously (as discussed here and here) to kick-start a separate capital markets regime for SMEs, it does not appear to have met with much success.
Under the Regulations, a separate institutional trading platform is available in an SME exchange for listing and trading of specified securities of SMEs for informed investors. Such listing may be availed of without going through a public offering process. In other words, this provides exit options to investors even where the company or the promoters do not require additional capital to be raised from the public.
This facility is available to SMEs that meet certain conditions, as follows:
(i) There are certain positive qualifications to be satisfied. For example, the company must be truly an SME judged by parameters such as revenues and paid up capital. Hence, the facility is available to companies that have completed not more than 10 years after incorporation and where their revenues have not exceeded Rs. 100 crores in any of the previous financial years. Moreover, the paid up capital of the company must not have exceeded Rs. 25 crores in any of the previous financial years.
(ii) The company must have a credible supporter who has a financial stake in it. This can include an alternative investment fund, angel investor, project financier, merchant banker, qualified institutional buyer or the like who has taken at least a certain financial stake (in equity or debt, as appropriate) in the company as prescribed in the Regulations.
(iii) There are certain disqualification requirements, in the sense that the company should not be subject to certain circumstances such as winding up, labeling as a willful defaulter, or the subject of a regulatory action under relevant legislation.
Although there is no IPO requirement, the process of listing necessitates appropriate disclosures. Hence, the company is required to prepare an information document containing prescribed disclosures, which must be hosted on the website of the recognised stock exchange. These disclosures appear far less onerous compared to those in an IPO. Also, the information document is not required to be filed in draft form before SEBI for its comments. Hence, the listing is largely a private process with limited regulatory involvement, except on the part of the stock exchange. At the same time, the information document is subject to the customary liability provisions of the Companies Act and relevant SEBI regulations in case of any misstatement.
There is also a minimum promoter lock-in of 20% shares for a 3-year period.
The institutional trading platform appears to be structured as a temporary measure rather than a longer-term liquidity solution for SMEs. While the company is always free to exit the platform through a special resolution of its shareholders where 90% of the total votes and a majority of non-promoter votes have been cast in favour of an exit, the company would be forced to exit in certain circumstances. These include upon the expiry of a 10-year period from listing, or if the company has a paid-up capital, revenues or market capitalisation beyond prescribed limits. In other words, if the company ceases to be an SME in fact, then the institutional platform is no longer available.
From the investors’ perspective, the institutional trading platform is being made available only to large investors, on the assumption that they will be sophisticated and informed with the required wherewithal to bear the risk of investing in a company without appropriate disclosures such as a full-blown prospectus. This is ensured through a numerical materiality test, which is that the minimum lot for investment in the platform is Rs. 10 lakhs.
The Regulations are timely in that they provide an exit opportunity to investors in SMEs. This may in turn help capital raising by SMEs on better terms. It may also have an overall impact on the economy as the SMEs play an important role in growth and productivity. However, it remains to be seen whether the SME and investor communities will adopt this route in line with the regulatory expectations.