World over the SME sector is playing an important role in the social and economic development of any country so Growth of SME sector is highly crucial for the growth of a country to curb the problems of poverty, income inequalities, unemployment, and regional imbalances.
In India the SME sector contributes considerable proportion in the national income and is witnessing rapid growth and more and more efforts are being taken in the development and promotion of this segment. Various government initiatives such as Skill India, Make in India, Start-up India, Pradhan Mantri MUDRA Yojana, Public Procurement Policy to encourage growth and innovation in the SME sector in agricultural, manufacturing and service industry.
The SME sector faces numerous challenges that impede the growth which include-
1. Inadequate funds and timely access to liquidity is one of the biggest hurdles in the growth of SMEs.
2. Lack of skilled manpower
3. Technological and digital barriers
4. Lack of desired infrastructure for holistic growth
All these challenges hold the development of SME sector to its full potential. All the above challenges are more or less due to a lack of adequate capital or complete knowledge on access of money from various sources like the bigger companies. To overcome this challenge, one of the important measures is taken by launching the SME platforms by BSE & NSE in the name of “BSE SME” & “NSE SME” respectively to allow SMEs to achieve their growth and expansion by raising capital from the public.
1.What is in offer?
The SME IPO offers equity participation from investors in SMEs & by dilution of stake, a business is able to infuse funds on profit sharing basis instead of incurring fixed interest cost. Below are enumerated in detail:
a. Equity participation
Right mix of debt & capital, is one of the most important factors for growth of a business. Promoters can invest fund in initial stage of business but for next level of growth funding has to be raised from outsiders. The funding can be raised as Equity Participation from investors or Debt from financial institutions.
Up to certain level of growth of a business, debt is more beneficial but a business is tend to be risky when it is on high leverage. So by infusion of additional equity it can continue to be attractive for debt funding.
b. No fixed interest cost instead it is on profit sharing
Equity participation happens on profit sharing basis & based on bright outlook of the business so does not carry fixed cost of capital but investors tend to invest only when they feel good return is expected from their investment
a. Any Business House working as “Ltd Entity”
An SME may be working in any form but for SME IPO it needs to convert into a limited entity to raise the equity capital through the sale of shares.
b. Annual turnover is 20 crores +
The annual turnover should be 20 crores plus to be taken positively by investors for investment. However lower turnover businesses can tap other source of funds also till they achieve this benchmark of turnover.
c. Minimum EBDITA in the range of 10% ~ 15%
A business need not declare hefty profits to think on fund raising through Equity. A reasonable business earning sufficient to meet its obligation related to Depreciation, Interest, Taxes & Amortization of initial expenses, is considered a good business.
d. Vintage is 3 Years +
A business run successfully for three years is considered having reasonable vintage to judge the business competence of the management, growth prospectus by viewing comparative numbers, Earning potentials & possible threats for the operation. In other words complete SWOT analysis is possible with the three years performance.
i. Funding can be raised from 2 crores to 25 crores or more provided the paid up capital after the issue is not above Rs. 25 crores.
ii. The funding can be above Rs. 25 crores if the shares issued at premium.
a. SME Businesses with less vintage
A business with less vintage is not able to present its operational efficiency, competences, prospectus & prospective risks so the chances of fund raising through issuance of equity is very low so not advisable.
b. Businesses with Low turnover & lower EBDITA
Equity is required when a business reaches its limit or prospectus is very high. When the current operational numbers are not very promising then investors generally not prefer such proposals.
Any business has to plan the desired funds according to the growth prospectus of business. In other words no opportunity is missed out due to short of capital. The Fund raising plan depends upon the funding capacity of promoters, product potentials, existing capital status (i.e. mix of equity & debt) & business risks. Below points elaborate the way in detail:-
a. Proper disclosure of all aspects of the IPO, is a key factor in contributing to the success of the IPO.Ensure that financial numbers are perfectly explained both sides of the IPO; the business side of the company and the stock market perspective of the company.
b. Selection of an investment banker is highly important for successful fund raising. Normally, investment bankers are invited to present their views on IPO positioning, capacity to line up investors, coordinates road shows, understand the pulse of market, effective management of back-end processes and due compliances of exchange and SEBI without hitches.
c. Assess the opinion and appetite for the stock well in advance by meeting with investors and research analysts prior to filing for the IPO. The planning process support to hone your story and practice responding to the types of questions investors will ask. Remember, this is the rehearsal before the actual pitch.
d. There is always a premium in the stock market for higher levels of transparency and disclosure practices. Don’t use terms like Adjusted Cash Flows, Adjusted EV or Adjusted EBITDA etc. Investors tend to assume the worst will come when they see new metrics of financials post IPO so they will avoid till they are able to duly forecast the business performance.
e. Pricing determines the success of an IPO. Make sure there should be reasonable value which can fetch by investors post closure of IPO price. It is determined with true valuation of an entity & balancing act between issue price & fair value of stock.
a. Considering today’s scenario of uncertainty, the equity dilution is the best source of fund raising to rationalize the business risks for all eligible business houses.
b. funding is at no interest cost, only on profit sharing
c. Beginning of unlimited source of funding by migrating to main board.
a. Potential loss of control compare to earlier status of absolute authority
i. By issuance of equity shares implies delegation of business risks among various investors on the pretext of profit prospectus. So when a business is not able to perform then the investors raise questions on the operational efficiency of the management & seek clarification for the inefficiencies which otherwise not asked when 100% holding lies with promoters.
ii. But such inquiries are good for business to put lid on inefficiencies & early detection of challenges results finally into appropriate action from management for control of losses.
b. The investor community is not able to see the day to day operation so needs regular updates on financial information i.e. quarterly, half yearly & annually with different quantity of information.
The flow of information has to be maintained & not only information flow but also timely flow of information is appreciable in the eyes of investors to judge the prospectus of the business.
SME IPO is a mechanism to raise funds by enlarging the business stakeholders whereby promoters are able to reduce their risk by making investors as participant of their growth story with or without loosing management control of the business
The cost of listing comprises various aspects like fee charged by lead manager, legal advisor, registrar, relevant stock exchange’s fee, depositories fee etc. These are dependent on the quantum of funds desired to raise from SME IPO route.
Any entity desiring to list its business at SME Exchange should be profitable & should have completed at least 3 years of operation to fairly visualize the execution capabilities of promoters. There is upper limit on fund raising through SME Exchanges & after crossing the specified threshold, it need to be listed on normal exchanges. Besides this the entity should have +ve networth.
Yes. There are annual maintenance charges payable to registrar, depositories & exchanges which depend upon the capital base listed on the exchange.
I approached to Mr. Bansal when we were stuck for an urgent fund requirement for our group organization. He took time to analyze & made detailed presentation of our business. He brought multiple lenders on-board after clearing their doubts & queries. Though our Finance team was supporting him but we seldom spare time to think how the things would mature. Thankfully to his minute planning, we were able to secure desired funding timely. I would like to state very categorically that after shouldering the responsibility to Mr. Bansal, one can rest assure for best possible executions. The actual delivery may be delayed but delivery remains visible because of his transparent & logical working. If any business house is unable to get desired funds, a consultation with Mr. Bansal is highly recommended to get to know the way out to come out of woods. His meticulous working has no comparison.
Mr. Bansal is highly supportive to understand a business & its needs. I have approached him twice during last two years & thanks to his execution capabilities & assessment he advised me pin-pointedly to plan the expansions & after that dotted execution has made me confident to move ahead my business expansion. I highly recommend an SME business to consult Mr. Bansal for his impartial advice on funding. I can vouch for his transparent, straight & honest advice which will help in focused working.
We came across Mr.Naresh Bansal in the year 2017 and have been availing his services till date in raising business funding through multiple NBFCs/MNC banking institutions and have been extremely satisfied by his approach towards achieving the objectives detailed to him. He bears a good moral character and is highly motivated and focused in his approach.
A mild mannered gentleman who has a heart of a tiger within.
Wish him all the very best ALWAYS
We have approached with susceptible thoughts about fund raising because our quantum of funds was high & unable to offer security for it but when Mr. Bansal assure us about fund raising, we first doubted on his statements but thanks to his execution skills we achieved the desired funding in record timeframe.
Presentation of good feature of a business & hard bargain on the cost is his one of the best skill to assess. May God bless him more to understand & deliver good work.
Mr. Bansal personally himself gives attention to minute detail of the business & highly focused on the results. A thorough gentle and transparent approach made him above the normal service providers.