Securities and Exchange Board of India
Stock exchanges/ platforms of stock exchanges for Small and Medium Enterprises
1. Background:
1.1. The Board had approved a Framework for recognition and supervision of stock exchanges/ platforms of stock exchanges for small and medium enterprises (copy placed at Annexure I). Accordingly applications have been received for setting up a separate SME exchange Platform from NSE, BSE, MCX-SX, Inter-connected Stock Exchange and Bangalore Stock Exchange.
1.2. Further required operational details for implementing the above framework are enumerated below for consideration and approval of the Board.
2. Primary Market issues
2.1. Stipulation in the previous Board Note: The requirement of having 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, as per the existing DIP Guidelines, may be relaxed completely for companies listed on a SME Exchange/Platform.
Revised proposal for consideration by the Board: It is proposed that companies listed on the SME exchanges be exempted from the entire set of eligibility norms applicable for IPOs and FPOs prescribed in the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2009 (ICDR). Specifically this
would include regulations 25, 26 and 27 of Chapter III of ICDR with the exception of provisions relating to market making (viz. Regulation 26(2)(b)(ii)(B)).
2.2. Stipulation in the previous Board Note: To be listed on the SME exchange, a company should have a maximum post-issue paid up capital of Rs. 25 cr.
Revised proposal for consideration by the Board: It is proposed to mandate an upper limit of Rs. 25 cr. paid up capital for companies on the SME segment/exchange and a lower limit of Rs.10 cr. paid up capital for companies listed on the main boards of NSE and BSE. This would enable companies with paid up capital in the range of Rs. 10 cr. to Rs. 25 cr. to choose between raising capital/listing on the main Board and the SME Board. If a company listed on the SME exchange chooses to seek listing on the main board of an Exchange, it will have to comply with all the requirements of the listing agreement of the main exchange and all regulatory requirements including compliance with ICDR after receiving shareholder approval for the same. The responsibility of ensuring compliance with this will rest with the main board of the Exchange. Necessary and consequential amendments to ICDR Regulations 2009 will be made.
2.3. Stipulation in the previous Board Note: There will not be any requirement of vetting of the offer document by SEBI since the investors in Companies listed on the SME Exchange/platform are expected to make informed and calculated investment decisions.
Revised proposal for consideration by the Board: The offer document will have to be filed with SEBI and the exchange. Merchant Bankers of SMEs shall submit due diligence certificate to SEBI and ensure that the offer documents are displayed on their websites as well as on the website of the exchange/platform. This will be similar to the
required to file the draft offer document to SEBI. No observations would be issued by SEBI on the offer documents filed by the MBs.
2.4. Stipulation in the previous Board Note: The merchant bankers/underwriters in the IPO shall be compulsorily required to be market makers for the company for a period of at least 3 years.
Revised proposal for consideration by the Board: The Merchant Banker to the issue will bear the overall responsibility for market making for a minimum period of three years.
3. Additional Issues relating to market making:
3.1. Revised proposal for consideration by the Board:
3.1.1. Market making might result in a Merchant Banker (MB) having large holding of shares in its portfolio akin to a Private Equity investor. This is a situation most Merchant Bankers would want to avoid as such an activity would not be in their domain of expertise or their main line of business. In the consultative process, several Merchant Bankers requested that they may at their option be allowed to do market making along with a disclosed nominated investor (like PE, VC, HNI and QIB). Under this arrangement, all the stock being bought and sold as part of market making will ultimately get transferred to the disclosed nominated investor with whom the Merchant Banker has a contractual agreement. It is proposed that SEBI may permit such an arrangement to facilitate the compulsory market making stipulated and make it easier. Under this arrangement market making will remain ultimately the responsibility of the Merchant Banker itself. It may also be mandated that the Merchant Banker should disclose their intention of this arrangement and have it approved by stock exchanges where the issuer SME is listed.
3.1.2. Certain well capitalized registered entities like Venture Capitalists may be allowed to have a contractual agreement with the Merchant Banker to share the burden of devolvement of underwriting obligation.
3.1.3. Promoters/acquirers should not be allowed to sell their shares to market makers to avoid a situation where promoters/acquirers dump their shares on the market maker. Therefore during the compulsory market making period, promoters/acquirers may be allowed to dilute their shareholding only through offer for sale or to an acquirer.
3.1.4. SEBI regulations on takeover (Substantial Acquisition of Shares and Takeovers Regulations) will not be applicable to acquisition of shares through Merchant Banker /Market Maker provided that the Merchant Banker/Market Maker does not have the intention of taking over the management and there is no change in control (direct /indirect) of the company.
3.1.5. Merchant Bankers who have the responsibility of market making and have a firm allotment made in IPO for purpose of market making may, at their option, be represented on the board of directors of the company in view of the commitment of market making subject to agreement of the issuer. However this will not be mandatory on the Merchant Banker.
3.2. Stipulation in the previous Board Note: Specialized Merchant Bankers under the SEBI (Merchant Bankers) Regulations 1992 shall be registered for exclusively catering to the needs of the SME segment. The Merchant Banker will be responsible for conducting due diligence and for ensuring the accuracy and adequacy of disclosures in the offer document.
Revised proposal for consideration by the Board: No separate category of Merchant Bankers will be created. The existing Merchant Banking Regulations will be suitably amended to provide for a
separate list of requirements/responsibilities for the Merchant Banker to a company on the SME exchange/platform.
3.3. Stipulation in the previous Board Note: Underwriting may be made mandatory. Further the merchant bankers for the IPO may be required to compulsorily underwrite the issue fully.
Revised proposal for consideration by the Board: Merchant Bankers will be required to (ensure that the issue is 100% underwritten). However only a certain (minimum) percentage of the issue size (15 %) may be mandated to be compulsorily underwritten by the Merchant Banker itself
3.4. Stipulation in the previous Board Note: There will be no restriction on the minimum number of investors, subject to compliance with the relevant provisions of the Companies Act 1956.
Revised proposal for consideration by the Board: A minimum number of investors (say 50) shall be specified for the IPO only. There shall be no continuing requirement of maintaining the minimum number of investors. However, compliance with the requirements of Companies Act, 1956 needs to be ensured at all times.
4. Secondary Market issues
4.1. Stipulation in the Framework which is now in the public domain: The framework which has been placed in the public domain mentions that the trading members of the SME exchange shall register themselves with the exchange and SEBI.
Revised proposal for consideration by the Board: After consultations with the stock Exchanges and Merchant bankers it was felt that no separate registration for brokers intending to service companies listed on the SME exchange/platform needs to be
mandated. Existing brokers in cash segment will be entitled to trade in both Cash and SME segment without any new registration.
5. Continuous listing requirements:
5.1. Stipulation in the previous Board Note: The companies listed on the SME exchange may be allowed to migrate to main board of an exchange as and when they fully satisfy the applicable listing requirements.
Revised proposal for consideration by the Board: Companies listed on the SME exchange/platform shall compulsorily migrate to an equity exchange/segment (main board) on exceeding the Rs 25 cr. post issue paid up capital limit. Further also, if follow on offer/rights issue results in triggering of the above limit (of Rs. 25 cr.) then the company would have to migrate to the main Board.
5.2. Stipulation in the previous Board Note: Companies may post their annual reports on their web-sites and the web-site of the exchange Physical copies of the same may be provided to the shareholders only on specific request. The requirement of sending annual reports to all the shareholders may be dispensed with.
Revised proposal for consideration by the Board: With regard to relaxation in the requirement of sending annual reports to the companies, it was suggested by the Ministry of Company Affairs that companies on the SME Exchange/Platform may follow the provision of Sec. 219 (1) of the Companies Act, 1956. This allows a listed company to circulate to its shareholders a simplified statement containing salient features of balance sheet and P&L A/c and other related documents. This information shall also be displayed on the web-site of the exchange. It is proposed that Board may stipulate that companies on the SME Exchange/Platform may follow the provisions
of Sec. 219(1) of the Companies Act, 1956. Further the Company shall compulsorily maintain a web-site on which this information can be displayed.
5.3. Proposal for consideration by the Board: In the discussions with Stock Exchanges and Merchant Bankers, it was suggested that investors with holdings of value less than Rs. 100000 (such reduction in the holding may have been due to fall in prices or his having offloaded a part of the holdings previously), provided that he sells his entire holding in that scrip in one lot) to off load their holding to the Market Maker in that scrip. Market Makers may be authorised to buy these shares from such investors. In the absence of such an arrangement, investors with less than the minimum lot size of Rs.100,000 will not be able to dispose of their holding through regular trading on the SME Exchange/platform itself.
6. Other Issues
6.1. The proposed relaxations in the listing agreement are detailed below:
Ser. No.
Changes proposed in provisions of Listing agreement for SME
Our Comments
i. Clause 24 (c) pertaining to vetting of offer document by SEBI and acknowledgement card issued by SEBI
SMEs may be exempted from complying with this clause as there is no issuance of observations on the offer document by SEBI. Consequential changes in other clauses of may also be made.
ii. Clause 32 provides for submission of complete and full balance sheet, P & L account and the Director’s Report to each shareholder.
• Compliance with clause 32 may not be mandated for SMEs. • They may send a
statement containing the salient features of all the documents as
prescribed in section 219 (1) (b) (iv) of Companies Act, 1956. • However, the clause
may also provide that in case of SMEs, complete balance sheet, P & L account and the Director’s Report shall also be made available on the website of the SME exchange and the Company's web-site. iii. Clause 41 (1)– Preparation
and submission of financial results
In clause 41 we may mandate preparation and submission of financial results on a “half yearly basis” for SMEs, instead of “quarterly basis”.
iv. Clause 41 (VI) Publication of financial results in news papers
SMEs may be exempted However; we may mandate the SMEs to provide the financial results (full and complete balance sheet, P& L account and Directors report) to the SEs within 15 minutes of conclusion of the board meeting where the financial results were approved. The SEs shall then make it available on its website.
v. Clause 49 (corporate governance)
All the provisions of clause 49 need to be complied with.
vi. Clause 52(Filing of Information through corporate filing and dissemination system (CFDS) platform
The provisions of this clause may initially be made optional for SMEs.
7. Further steps:
7.1. A revised listing agreement has to be drafted in consultation with the stock exchanges.
7.2. Separate chapter dealing with regulations for Merchant Bankers for SME purposes has to be framed.
7.3. Further details of the exemptions to be given in ICDR Regulations 2009, as approved by the Board will have to be worked out.
This memorandum is put up for the consideration and approval of the Board. If approved, Chairman SEBI, may be authorized to take such steps as may be necessary, consequential and appropriate in this regard, including making necessary amendments to the listing and de-listing guidelines and any other Regulations, Guidelines etc. for this purpose.
