Facing Capital Crunch? - An Analysis of SME IPO as an option

Small and medium enterprises (SMEs) are the major contributor to Indian Economy. They provide employment to over 40% of workforce in India and contribute around 45% of manufacturing output. In India, due to their low scale and poor adoption of technology, SMEs have very poor productivity. Financing is the biggest challenge and the lack of it is the main reason for an SME going out of business.

Presently, SMEs are hugely depends upon Bank and Financial institutes for their capital requirement. Banks and Financial institutes give loan subject to many conditions. Banks grant loans subject to the security interest in company's assets and sometimes on director's personal property. From 2012, BSE and NSE launches SME platform for raising fund by SMEs from the capital market. The requirement relating to listing by these SMEs are relaxed.

Eligibility Criteria for IPO:

• Net Tangible assets of at least Rs.3 crores as per the latest audited financial results

• Net worth (excluding revaluation reserves) of at least Rs.3 crores as per the latest audited financial results.

• Track record of distributable profits in terms of sec. 123 of Companies Act, 2013 for at least 2 years out of immediately preceding 3 financial years OR Net worth shall be at least Rs. 5 crores.

• The post-issue paid up capital of the company shall be at least Rs.3 crores.

Other Requirements:

• The Company shall have a website

• The company shall mandatorily facilitate trading in demat securities and enter into an agreement with both the depositories.

• There should not be any change in the promoters of the company in preceding one year from date of filing the application to BSE for listing under SME segment.

Benefits

- Easy access to Capital Different Exchange
- SME provides an avenue to raise capital through equity infusion for growth oriented SME's.
- Liquidity Listing also provides an exit route to private equity investors as well as liquidity to the ESOP-holding employees.
- Employee Incentives
- Employee Stock Options ensures stronger employee commitment, participation and recruitment incentive.

Cost

The main thing every promoter asks is how much its cost to the company. The cost would be 40-50 Lakhs but forgot the one time cost of IPO. Loans from banks also come with the monthly/quarterly repayment burden. Equity financing lowers the debt burden leading to lower financing costs and healthier balance sheets for the company.

Prerequisites before launching SME IPO

1. Make necessary changes in the board of director of the company. Appoint Independent Director, Company Secretary and Chief Financial Officer

2. Make sure company has its own updated website having the Financial statement of last 3 years.

3. Make necessary changes in the capital structure of the company. Increase authorized and paid-up capital of at least upto Rs. 3 crore.

4. Consult merchant bankers, share transfer agent and depositors and execute an agreement with them. So considering the above fact, Company should plan for IPO for their capital requirement and after few years the Company can also transfer from SME Platform to Main Board. Though this Facility is available since long but only 250 companies able to grab this opportunity. Now its time to Rethink about this opportunity.