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Bombay Stock Exchange Ltd. BSE SME Exchange Bombay Stock Exchange Limited 16 th July, 2011 Soyal Gupta BSE SME Exchange

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Bombay Stock Exchange Ltd.

BSE SME Exchange

Bombay Stock Exchange Limited

16th July, 2011

Soyal GuptaBSE SME Exchange

Section Contents Page

Table of Contents (1/2)

2

A Introduction 4

B About SME Industry 11

C Need for SME Exchange 14

D SME Exchange - An Overview 18

E About BSE SME Exchange 27

F Key Players 35

Section Contents Page

Table of Contents (2/2)

3

G Preparations for the IPO 37

H Beneficial Aspects 42

I Promoting the BSE SME Exchange 49

Introduction

Vision and Mission

Vision

Wealth creation by the SMEs through inclusive economic growth.

Mission

Provide the world class platform for the SMEs and Investors to come together and raise the equity capital.

Message to the Entrepreneurs and Investors

“BSE SME Platform provides a great opportunity to the entrepreneurs to raise

the equity capital for the growth and expansion of SMEs. It also provides the

immense opportunity to the investors to identify and invest in the good

companies at early stage. It will help unleash the valuation of the company and

in the process create wealth for all the stakeholders including investors,

besides considerable long term capital gains tax benefits and facility to exit at

any point of time”

Capital Market Regulator SEBI has given ‘In Principle’ Approval to Bombay Stock Exchange (BSE) Ltd. to launch the BSE SME Exchange/Platform .

BSE is leveraging the existing ‘Equity platform’ i.e. BOLT System for launching the BSE SME Exchange. Negligible cost in launching the platform.

All Merchant Bankers empanelled with SEBI are by default MBs for this segment. Additional responsibility of secondary market for market making.

All Members registered with BSE are by default Members for this segment. No additional infrastructure required by Members for secondary market trading.

Introduction

7

SME companies with post issue paid up capital up to 25 crore can list on the BSE SME Exchange.

100% under writing by the Merchant bankers mean that the SME listing-cum-IPO issue will be 100% success.

Larger participation of investors – exit option

Liquidity in the secondary market – Market Making

Better opportunity for SMEs for equity fund raising.

Introduction

8

The new thing about the SME Exchange is that the issue will be 100% underwritten and this means that the issue will be 100% success. Other new aspect is that there will be support of three years in the secondary market through market making activity.

The SMEs with paid up capital up to Rs. 10 crores can come on the SME Exchange, in contrast to the paid up capital of Rs. 10 crores or more for the main board.

The Listing norms have been simplified. The issuer has to take the approval of the Exchange and SEBI approval is not required. A copy of the offer document will be sent to the SEBI for their information.

How Different from Main Board (1/2)

9

The Compliance norms are simplified. Half yearly compliance is required instead of quarterly compliance.

The abridged version of the annual reports need to be sent to the investors instead of the entire annual report and posting the soft copy of the report on the website is sufficient.

The issue expenses will be minimal on the marketing and stationery. However, the issue will be charged for underwriting, sub-underwriting and responsibility of three years market making.

Market Making is compulsory for 3 years, unlike on main platform.

How Different from Main Board (2/2)

10

About SME Industry

About SME Industry

12

Classification of Micro, Small and Medium Enterprises

Micro, Small and Medium Enterprises (MSMEs) contribute - 8% of the country's GDP - 45% of the manufactured output- 40% of our exports

Provide employment to about 6 cr. people through 2.6 cr. enterprises.

The Micro Small and Medium Enterprise (MSME) sector forms the largest generator of employment in the Indian economy.

The MSME sector forms a major portion of the industrial activity.

About SME Industry

13

Need for SME Exchange

Provide the SMEs with equity financing opportunities to grow their business – from expansion to acquisition

Equity Financing will lower the Debt burden leading to lower financing cost and healthier balance sheet

Expand the investors base, which in turn will help in getting secondary equity financing, including private placement

Enhance company’s visibility. Media coverage can provide SME with greater profile and credibility leading to increase in the value of its shares

Incentives for greater venture capital participation by providing an exit option thus reducing their lock-in period

Need for SME Exchange

15

Greater incentive for the employees as they can participate in the ownership of the company and benefit from being its shareholders

Encourage innovation and entrepreneurial spirit

Capital Market will help distribute risk more efficiently

SME sector will grow better on two pillars of Financial system i.e. Banking and Capital Market

Initiating a dedicated Stock Exchange for SMEs’ will lead to mobilization of the diversified resources of finance and build a bridge between the SMEs, Private Equity and the Venture Capital by providing an exit route.

Need for SME Exchange

16

Life Cycle of a Company

PE Firms hold the hands of SMEs

Supported by Venture Capital Firms

IPO

Decline due to lack of funds

Nascent Stage

Growth Stage

Developing Stage

Expansion Stage

Unl

ocki

ng t

he C

apit

al M

arke

t O

ppor

tuni

ties

Profitability

High Risk & Lower Profit Margins

Increase in Sales & Rise in Profit

Stable Profit Margins

Profit Margin tends to rise as the business expands

SME Exchange - Overview

SEBI has issued a final circular on May 18, 2010 for setting up a stock exchange/ platform by a recognized Stock Exchange having nationwide trading terminal

The necessary amendments have been made in the various SEBI Regulations

Model equity listing agreement has been notified by SEBI on May 17th, 2010

BSE is eligible for setting up SME exchange and already got the ‘In Principle’ approval from the capital market regulator ‘SEBI’ for launch of SME Exchange

SME Exchange - Overview

19

Issuer with post issue face value capital up to Rs.10 crores shall be covered under the SME Platform, Issuer with post issue face value capital between Rs.10 – 25 crores may get listed at SME Platform and Issue with post issue face value capital above Rs.25 crores has to necessarily listed at main board of the Exchanges

Suitable provisions for migration to/ from main board

The minimum application amount as well as minimum trading lot shall not be less than Rs.1,00,000/-

All existing Trading Members would be eligible to participate in SME exchange without any further registration

100% underwritten issues and Merchant Banker/s shall underwrite 15% in their own account

The Merchant Banker to the issue will undertake market making through a stock broker who is registered as market maker with SME Exchange. The Merchant Banker shall be responsible for market making for a minimum period of 3 years

SME Exchange – SEBI Guidelines

20

Shall be required to provide two way quote for 75% of time in a day, to be monitored by the Stock exchange

The minimum depth of the quote shall be Rs.1 lakh

Not more than 5 market makers for a scrip

Market Makers may compete with the other Market Makers

Market Maker allowed to deregister by giving one month notice to the exchange

The exchange shall prescribe the minimum spread between Bid and Ask price

During the compulsory market making period, the promoter holding shall not be eligible for the offering to market makers

SME Exchange – SEBI Guidelines – Obligations of Market Makers

21

ICDR Guidelines chapter XA clearly specifies that it will attract all the provisions of main ICDR guidelines where the exemptions are not being provided under these provisions.

Clearing and Settlement Mechanism– The existing clearing and settlement of the equity (cash) segment will be

extended to the SME segment also.

Interpretation of Regulations (1/5)

22

Interpretation of Regulations (2/5)

Investor Protection Fund– The provisions of the IPF for the main board apply to the SME Exchange also.

Takeover Code Regulations– Takeover code will not be applicable to the Market Maker. – The buy or sell of the shares by the Market Maker for Market Making activity

is exempted. – However, the takeover code will apply for all the investors.

Interpretation of Regulations (3/5)

Long Term Capital Gain tax– The sale of unlisted shares in short term attract the capital gain tax of 30%

and the long term capital gain tax of 10%.– The sale of listed securities in the short term attract the capital gain tax of

10% and there is no long term capital gains tax. – This makes it clear that the listing of shares very attractive.

Risk Management System– The Risk Management will be applicable to the BSE SME Exchange the same

way as that of the BSE main board. All the M-to-M (Mark to Mark) Margins, VAR Margins, ELM (Extreme Loss Margin) and special margins as applicable to the main board will also apply for the SME Exchange.

Interpretation of Regulations (4/5)

Grading of IPOs– As per ICDR guidelines, the grading of IPOs is compulsory. The same applies

to the companies to be listed on the BSE SME Exchange also.

Website for the SME Companies– The Regulator has made it mandatory for the companies to have websites, if

they propose to be listed on the main board. – The same applies to the SME companies, if they want to get listed on the BSE

SME Exchange.

Investor Grievance Redressal System– The Exchange has the IGRC (Investor Grievance Redressal Committee) to redress

the complaints of the investors against the members. – If amicable solution is not reached, the members can opt for arbitration. – The Grievance Redressal System of the equity (cash) segment will be made

available for the SME Exchange also.

Corporate Governance – Clause 49 of the listing agreement and corporate governance will be applicable

for the SME Exchanges also. – There has to be 50% independent Directors and the remaining 50% will be

promoter Directors.

Interpretation of Regulations (5/5)

26

About BSE SME Exchange

The BSE is leveraging the existing equity platform for the BSE SME. The BSE SME Segment will be part of the BSE BOLT System.

The companies on the SME Exchange will be included as a group in the BSE’s BOLT system – ‘M’ and ‘MT’ Groups.

The systems necessary for monitoring the market making activity and providing the quotes are made ready to comply with SEBI Regulations.

The trading time of this platform is from 09:00 am to 03:30 pm

BSE is fully equipped to launch the BSE SME Platform.

Trading System of SME Exchange

28

Only the Members of the stock exchanges recognized by the SEBI can act as Market Makers.

The members desirous of becoming market maker have to get themselves registered as market maker with the BSE SME Exchange by filing the registration form.

These members should have a minimum experience of 3 years, minimum net worth of Rs. 5 crore and a daily turn over of Rs. 10 crore. The market maker shall have additional net worth of Rs. 2 crore for additional scrip.

Market Makers

29

All the market makers in a scrip will provide 2-way quotes for 75% of the time in a trading day.

The market makers will have to hold 5% of the specified security to be listed at the time of allotment in their inventory to do the market making.

The market makers can also buy from or sell to the nominated investors the required shares for market making. The merchant banker and nominated investor need to enter into an agreement in this regard.

The nominated investors can be QIBs and PE Firms who are registered with the respective Regulator.

Market Making & Nominated Investors

30

BSE has prescribed the slab wise spread for the scrips depending upon their secondary market transaction price.

The spread prescribed varies from 5% to 10% depending on share price.

A minimum spread of 5% is prescribed, which shall facilitate the market making and make it easier for the members empanelled.

Bid and Ask Spread on SME Exchange

31

Trading of Odd Lots

Odd lots may get created because of the corporate action taken by the company from time to time, like issuing bonus shares, warrants and rights issues.

According to the SEBI guidelines, the odd lots can be sold only to market makers and the investor has to give the declaration that he is selling all the odd lot shares of the particular scrip to the market maker.

All the market makers for scrip put together shall do market making for more than 75% of the market timing.

In case the market makers for scrip fail to comply with these provisions, BSE has prescribed the monetary penalties.

Penalties for Market Making Violations

33

Any SME on BSE SME Platform having a paid up capital more than Rs. 10 crores can move to the main board provided that the special resolution is passed in the AGM in favor, with at least two third of the number of votes cast by shareholders other than promoter shareholders and then apply to BSE SME.

The SME migrating to the main board has to comply with all the main board norms like minimum 1000 investors, pay main board listing fees and do the quarterly compliance etc.

Migration from SME Platform to Main Board

34

Key Players

Venture Capital Funds P/E funds Angel Investors HNIs Financial Institutions NBFCs QIBs Registrars Merchant Bankers Members and Market Makers Financial Advisors – CSs, CAs, CFOs etc SME Companies

Key Players

36

Preparations for the IPO

Preparations for the IPO – Contents of the Offer Document

38

Due Diligence on the various approvals required from regulatory bodies Due diligence on the applicability of various regulations Risk factors associated with the company External environment effecting the company Magnitude and listing out of litigations Business activity Past performance and financial results Material contracts and agreements Detailed report on promoters & management

Preparations for the IPO – Relevance of Due Diligence

39

Selection of investment banker Selection of registrar and transfer agent (RTA) Selection of syndicate member /sub- syndicate members Selection of electronic media and advertising agency Selection of Escrow Bankers Understanding of regulations pertaining to Stock Exchange, SEBI and the other

regulatory bodies

Preparations for the IPO – Role of Merchant Banker

40

Positioning of company through sustained media efforts including visual media Regular interaction with brokers, FII & FIs and HNIs Creating awareness about the issue to the investors Selection of potential bidding centers Effective equity story supplemented by proper research Presentation to the investors and the analysts Creating sustainable valuation and shareholder base Effective communication for better results

Preparations for the IPO – Marketing Strategy

41

Beneficial Aspects

A dedicated exchange for these SMEs will help them in finding a solution to their financial requirements and crunching expansion plans.

Listing of a company gives better valuation to the company. The debt and equity ratios will improve and balance sheet will look much healthier.

The listed SMEs will unlock their wealth in the medium to long term and will do the wealth creation for the promoters and the investors.

The listed SMEs will get better visibility among the investors. The investor base of the company improves for the listed companies in medium term.

How does the SME Exchange help SMEs (1/2)

43

The repose of faith by the investors – domestic and foreigners in the listed SMEs is high. Transparency and corporate governance will improve manifold by listing on SME Platform.

Listed company will have easy accessibility to alternate funding options. The banks, P/E funds and other financial institutions provide them the loans very easily. The fund raising through ADRs and GDRs become easier. Also, the company can raise more funds through follow on public offering.

The tax benefits are also immense. The long term capital gain tax on listed company is zero.

How does the SME exchange help SMEs (2/2)

44

The working of SME Exchange is not well understood by the SMEs in the country. The SMEs are mostly not well informed of the capital market issues and modalities of raising equity capital. There is need for conducting lot of awareness programs to educate them.

Merchant Bankers used to handle only the primary market issues so far. On the SME platform, he has to assist the company in the secondary market through market making for three years.

Merchant banker, issuer and market maker have to work as team for three years to make the market making activity a success. This is a huge challenge.

The investor base is limited and only the investors with a minimum investment of Rs. One lakh are allowed to participate.

Challenges for launch of SME Exchange (1/2)

45

We have interacted with the market intermediaries over the last six months. There were apprehensions about the SME model in the beginning.

After few rounds of discussions, we see the substantial change in the perception of the SME platform. Many merchant bankers are optimistic and the members with market making experience are positive about the SME Platform.

We are hopeful that these challenges will not be a roadblock for the successful take off of the BSE SME Platform.

Challenges for launch of SME Exchange (2/2)

46

A large number of merchant bankers are optimistic about the SME Exchange/ Platform. Except top 5 MBs, most of the medium size MBs are keen and already started working.

The market makers will get the fees out of the issue expenses, like the merchant bankers. The members who have the experience of market making in the past are positive on the scope of market making in this segment.

Investors’ outlook is not yet clear. But the investors with medium to long term perspective are optimistic on wealth creation opportunity in this segment.

Regarding the SMEs, the response has been extra ordinarily exciting. The SMEs are enthusiastic about the opportunity to raise the equity capital on BSE SME.

Outlook on the SME Exchange (1/2)

47

The professionals like Company Secretaries and Chartered Accountants have an important role to play in educating the promoters of the SMEs and guiding them in raising equity capital on BSE SME Platform.

The member brokers and the sub brokers having branches and franchises spread across the country can play important role in mobilizing and educating the SMEs with their market knowledge and experience.

Outlook on the SME Exchange (2/2)

48

Promoting the BSE SME Exchange

Approaching SMEs with high growth potential Illustrating Advantages of Listing Co-coordinating with Banks and Angel Investors for bringing the companies on

this platform Target industries at different locations and SME clusters Attract promising SMEs and the start- ups by professionals Attracting the SMEs through

– Chamber of commerce– Industry department under state government– Industry Associations

Attracting Promising SMEs

50

Road Shows Jointly organizing seminars with the ‘Chamber of Commerce' of different states

for illustrating advantages of listing Training Programs Advisory Committee Segment Awareness Programs Reaching the potential SME companies through web portals and mails

Marketing Activities

51

We have been conducting the Seminars for educating the SMEs on the benefits of listing and preparations required for listing on the SME Platform.

We have already conducted the Seminars in Maharashtra, Gujarat, Andhra Pradesh, New Delhi, Kolkata etc and lined up large number of Seminars to cover other parts of the country. We have detailed Marketing plan to reach out to the SMEs spread across the country.

We are tying up with channel partners which include various institutes and associations engaged in the development of SMEs so as to create awareness among the SME companies about the benefits of listing at this platform.

We are also educating the professionals through the platform of ICSI and ICAI , as the professionals can play important role in educating the promoters and management of SMEs.

Reaching SMEs across the country

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