Stock Market for Startups and SME
Stock Market for Startups and SME
Raising capital is a major challenge for startups in India. Banks in India are averse to lending for startups in the technology domain and very few startups get venture capital funded. Therefore, in an effort to provide better access to funding for startups, SEBI had recently proposed a stock market for startups and SME. In this article, we look at the features proposed by SEBI for the stock market for Startups and SME in India. It is important to remember that the stock market for Startups and SME is still in concept stage pending implementation.
Funding for Startups
Funding is a major area of concern for startups as it is one of the key requirements for starting up and running the business. Startups in the manufacturing sector or trading sector can avail startup bank loan for investment in building, machinery and inventory through term loan or working capital loans. However, banks do not fund expenses like marketing, research, development, salary, rent, etc., Hence, companies in the technology industry or services industry often cannot access bank funding and are forced to bootstrap.
Startup IPO in India
Startups and SMEs play a very important role due to their potential in terms of generating employment and income as well as fostering innovation and enterprise. Therefore, taking in view the existing constraints and the role of Startups and SMEs in nation building, it is imperative that the necessary enabling environment be provided for these enterprises to flourish.
Reducing Risk of Investing in Startups
Currently the risk of failure for a Start-Up or an SME is quiet high as compared to companies which have already grown larger. The early investors in a startup are also constrained by the limited options when it comes to exiting the company. Buy back by the promoter or scouting for another buyer are the normal options and in such situations the terms of exit may not be very favorable to the investor. Apart from assuming the risk of business failure, the risk of their investment being locked-in for very long durations is also one of the constraints faced by these investors in investing in Start-Ups and SMEs which drive up the cost of capital. This is due to the limited marketability of unlisted securities and the absence of a structured market place where all interested investors could look-in for possible investments and exit options.
Therefore, to mitigate risks of investing in startups and SMEs, it is important to list the shares of startups and SMEs in a tradable market. The listing would give the startup or SME better visibility and thereby wider reach to investors. With a structured market for investors, SMEs and Startups are more likely to easily find investors and also reduce capital cost.
How to Start a Private Limited Company and Raise Funding
Proposed Startup IPO and Capital Market
In an effort to make it easier for startups and SMEs to access capital, SEBI (Securities and Exchange Board of India) has proposed a stock market for Statsups and SME. Startups and SMEs will be able to list on this stock exchange without having to do an Initial Public Offering (IPO), making it easier to list.The SME Exchange will be not be accessible for the general public. The SME Exchange will be accessible only for institutional investors or sophisticated investors, thereby mitigating investor risk. The characteristics of the proposed SME Market include:
- The startup or SME must be a Private Limited Company.
- Listing of startups and SMEs without making a public offer or raising capital from the public.
- Company to meet entry norms specific to this segment to qualify for such listing without IPO.
- Company disallowed to make a public offer at the time of listing or while listed on this platform.
- Further capital raising to be done only through preferential allotment and rights issue route. There shall not be an option for renunciation of rights in such rights issue to limit public participation.
- The emphasis shall be on providing visibility to companies before investors and a structured platform for investors for easy entry and exit.
- Since the market is accessible only to informed investors, exit procedure may be customized to suit the investor profile with emphasis on approval of non-promoter shareholders rather than promoter having to provide exit to all other shareholders and therefore delisting regulations of SEBI would not apply.
Requirement for Listing on SME Exchange
In order to build trust on the proposed SME Exchange and develop it into a successful market, an eligibility criteria has been proposed for Startups and SMEs to list on the SME Exchange without an IPO. Some of the proposed eligibility criteria for a Startup or SME to list on the SME Exchange are:
- Minimum investment in the equity of the company by, either registered Venture capital funds, Alternate investment funds, Merchant banks, Qualified institutional buyers or specialized international multilateral agency or domestic agency like SIDBI, NABARD, or a PFI under Sec 4A of Companies Act and other approved categories of investors/ lenders.
- Receiving project financing or working capital financing from scheduled banks during the last 3 years may also be considered as one of the eligibility routes.
- Promoters and Directors group companies, etc. cannot being named in the wilful defaulters list on CIBIL, the company, its group companies and subsidiaries not having been referred to BIFR in the past 5 years, or any regulatory actions against the company, promoters or its directors in the past 5 years.
- To ensure that this platform is restricted only to start-ups and SMEs, it may be required that companies seeking to list on this platform are not older than 10 years or having revenues more than 100 crores or paid up capital more than 25 crores.
- Disclose Shareholding pattern on half yearly basis.
- Disclose abridged Financial Results on half yearly basis.
- Comply with Corporate Governance requirements as prescribed for the SME platform.
- Disclose Corporate Actions where corporate benefits are involved (like dividend, split, buyback, bonus, rights).
- Disclose details related to further raising of funds.
- Disclose any change in Management Team.
- Mandate a market lot of 10,00,000 so that only informed investors trade in this platform.
- In-order to ensure that the promoters continue to remain committed to the company even after listing, it is proposed that on similar lines to main market and existing SME exchange the promoters shareholding be put under 3 years lock-in to the extent of 20% of shares held by him at time of listing.