Executive Summary

Indian SME as a segment represents around 95% of the industrial units and right around
40% of the gross modern esteem included the Indian economy. It contributes around 34%
of the exports and 7% of the Indian Gross Domestic Product. There are around 3.6 million
enrolled SME's giving employments to approximately 20 million people. India positions
inadequately in getting to universal assets for running little and medium organizations. A
couple of SMEs in India had figured out how to get financing after a few unsuccessful
endeavour, others are attempting to remain above water, while a couple of others had
closed activities because of the absence of capital. Money related organizations that are
made to give cash-flow to the business people are either denying subsidizing through and
through or requesting galactic loan fees that would wipe out the benefit of these little
firms. SME Exchange is a trade set up to empower the Small and Medium Size Enterprises
to get recorded and work more effectively. A few noteworthy trades over the globe have
set up a different SME Exchange for the posting and exchanging of securities of SMEs. In
India, two noteworthy SME Exchange working viz. BSE SME built up by the Bombay Stock
Exchange and EMERGE, set up by National Stock Exchange.

Posting on a SME Exchange, gives the SME immense rundown of advantages both when
contrasted with the organizations recorded on the primary board and to the unlisted
organizations. In any case, the SME Exchange are confronting issue in advancing the trade
among the MSME and the speculators. There are couple of weaknesses that are limiting
SME trades in India to get well known among the SMEs and Investors.

Along these lines, this exploration plans to centre around the present situation of SME
trades in the Indian Stock Market, to distinguish the way to deal with promote the SME
trade among the SMEs and Investors and the purpose behind moderate development of
SMEs in India.
SME statistics, trends & reports:

Number of SMEs in India: The number is evaluated to be at 42.50 million, enlisted and
unregistered together.
SME and Employment opportunity: Employs around 106 million, 40% of India's workforce.
Products: Produces more than 6000 products.
GDP Contribution: Currently around 6.11% of the assembling GDP and 24.63% of Service
GDP.
SME Output: 45% of the aggregate Indian assembling yield.
SME Exports: 40% of the aggregate fares.
Bank Lending: Accounts for 16% of bank loaning.
Fixed Assets: Current settled resources at INR 1,471,912.94 crore.
SME Growth Rate: Has kept up a normal development rate of more than 10%.
Job creation every year: Every year 1.3 million job created in this sector.
Introduction to SME Exchanges
Introduction

The Micro, Small and Medium Enterprises shape the foundation of the Indian economy and
have progressed toward becoming engines of economic growth in India. It is evaluated that
the MSMEs represent very nearly 90 for every penny of the modern units in India and 40
for each penny of significant worth expansion is in the assembling area. It is progressively
perceived that the MSMEs assume an essential part in business creation and pay age on the
planet. SMEs are the biggest boss after horticulture part in India. This segment offers help
for intensity and utilizes around 106million individuals in India. There are around 30 million
working SMEs out of which is 80 for each penny are small scale enterprise. They contribute
9-10 for every penny of our GDP. Likewise, MSMEs can be effortlessly settled as their
prerequisites as far as capital; innovation, administration and even utilities are not as
requesting as it is because of extensive ventures. Their advancement is nearly connected
with more impartial conveyance of pay and consequently critical for neediness lightening.
Deve1opmet of the MSMEs has turned out to be critical to accomplish the overall
development in the nation.

The Micro, Small and Medium Entrepreneurs represent a phase in monetary change from
customary to current innovation. Amid 1960's, the conduct of the individual came to be
featured as a central point adding to Small-Scale Industrial Entrepreneurship. In this way,
the supply of Small-Scale Entrepreneurs came to be perceived as basic to advancement of
Small-Scale Industries. In India, state and private endeavours exist together. The Small and
Medium Enterprises division and business are left totally to private ventures.

The MSMEs delivered an extensive variety of modern items, for example, sustenance items,
drink, tobacco and tobacco items, cotton materials, fleece, silk, manufactured items, jute,
hemp and jute items, wood and wood items, furniture and installations, paper and paper
items, printing distributing and partnered businesses, hardware, machines, contraption,
apparatuses and electrical hardware. MSMEs likewise have countless ventures.
Subsequently, numerous MSME openings are developing out in fields like electric
merchandise and applications, medication, designing, farming, correspondence, nuclear
vitality, media communications, nourishment innovation, pressing and so on. These open
doors have been expanding quickly. Powerful and lively MSMEs can get profits by the new
open doors in both open and private modes. Lately, both government and private
organizations have started procedures and projects for building up the MSMEs aptitudes
among individuals.
What is SME?
The Ministry of Corporate Affairs has classified the companies in India based on the size of
the company. Accordingly, there are two types of companies;
a. Small Companies
b. Other Companies

A. According to section 7(1) of MSMED Act, 2006; a. In the case of the enterprises engaged
in the manufacture or production of goods pertaining to any industry specified in the first
schedule to the industries (Development and regulation) Act, 1951-

(i) A micro enterprise is an enterprise where the investment in plant and machinery
does not exceed Rs.25 lakh.

(ii) A small enterprise is an enterprise where the investment in plant and machinery
is more than Rs.25 lakh but does not exceed Rs.5 crore.

(iii) A medium enterprise is an enterprise where the investment in plant and

machinery is more than Rs.5 crore but does not exceed Rs.10 crore.

b. In case of enterprises engaged in providing or rendering of services and are defined in

terms of investment in equipment.

i. A micro enterprise is an enterprise where the investment in equipment does not

exceed Rs.10 lakh.

ii. A small enterprise is an enterprise where the investment in equipment is more than
Rs.10 lakh but does not exceed Rs.2 crore.

iii. A medium enterprise is an enterprise where the investment in equipment is more

than Rs.2 crore but does not exceed Rs.5 crore.
Sources of capital for SME
Capital is an important requirement for starting any business enterprises. For a small start-
up, accumulating capital often proves to be a troublesome process.
The major sources of capital for SME may be classified as:
1. Personal Finance
2. Debt Financing
3. Equity Financing

Personal Finance
Personal finance includes the personal savings of the entrepreneurs, promoters etc.
Personal finance is considered as the cheapest source of capital, as there are no finance
costs such as interest, dividend associated with the same. However, the funds generated
through personal finance are generally insufficient on their own to start and run an
organization. Thus, the source of capital from personal finance is often complimented by
the other sources of capital i.e. Debt Financing and Equity Financing.

Debt Financing
Debt financing simply means “The act of business raising operating capital or other capital
by borrowing. It is the most common method used for raising capital in SME sector. Capital
generation through debt financing includes the following sources:
 Bank Loans
 Loans from Friends and Relatives
 Issue of bonds and debentures

Equity Financing

Equity financing is the method of raising capital by selling company stock to investors. In
return for the investment, the shareholders receive ownership interests in the company.
Equity financing is a cheaper source of finance as compared to Debt financing as the
company is not under statutory obligations to provide returns to investors. The company
needs to pay the dividends to the equity shareholders only in case of profits. However, this
method of raising funds is not popular among SME sectors compared to public sector or
limited companies.
Need for SME Exchange
SME exchange is a stock exchange created to enable Small and Medium Enterprises to gain
access to financial capital from potential investors. SME Exchange is having robust
mechanism. It is fundamentally sustainable managed by experts. SME Exchanges are poised
to throw various opportunities and have immense potential. The government and
regulators have also recognised this fact and introduced various policy measures to help
SMEs grow including activation of SME listing platform. While the primary role of the SME
exchange is to provide funding, there are additional benefits from enlisting on a public
Exchange. As the Equity Financing is a developing source of funds amongst the Small and
Medium size enterprises, a stock exchange segment dedicated to the SME shall play a
major role in developing the SME sector. The mission to establish SME Exchanges in India is
to foster the development of a flourishing entrepreneurial culture and a competitive SMEs
sector to support economic development.
The need and importance of SME can be enlisted as follows:
 SME exchange will 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.

 It will expand the investors base, which in turn will help in getting secondary equity
financing, including private placement.

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

 It provides incentives for greater venture capital participation by providing an exit

option thus reducing their lock-in period.

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

 Encourage innovation and entrepreneurial spirit.

 Capital Market will help to distribute risk more efficiently by transferring the risk to
those, who are best able to bear it.

 SME sector will grow better on two pillars of Financial system i.e. Banking and Capital
Market.
 Thus, a dedicated Stock Exchange for SMEs’ shall lead to mobilization of the diversified
resources of finance and help to build a bridge between the SMEs, Private Equity and the
Venture Capitalist by providing an exit route to the investors.

International Scenario of SME Exchange

Out of 192 countries recognized globally, 149 have an official stock exchange. And among
those countries roughly 57 have an alternate market for small and medium companies to
raise funds. The alternate market functions mainly because the small and medium
companies do not qualify for listing on the official stock markets due to stricter financial
rules and regulation. The investor profile also differs in both the exchanges. While the main
exchange attracts investors from all walks of life, the alternate exchange caters to a more
educated investor who is aware of the risks involved in investing in start-up or growth
companies. These Boards and Exchanges facilitate Small and Medium size Enterprise as well
as new entrepreneurs to access the capital market as a source of finance. These alternate
markets operate with varying levels of success and efficiency. Today, most of the SME
exchanges form a part of larger organizations like New York Stock Exchange, Euronext,
National Association of Securities Dealer Automated Quotations (NASDAQ) OMX and
London Stock Exchange.
Some of the important SME Exchanges/Boards internationally are:
1. MOTHERS, Japan,
2. The Alternative Investment Market (AIM) in the United Kingdom,
3. KOSDAQ in the Republic of Korea
, 4. TSX – Venture Exchange (TSX-V) in Canada,
5. MESDAQ Malaysia
6. NASDAQ in the USA

A large section of investors such as Private Equity (PEs), Venture Capital (VCs), Angel
investors, High Net-worth Individuals (HNIs) and strategic investors are benefited from
these exchanges.
Indian SME Capital Market on Global Arena
SME exchanges or trading platforms are prevalent globally albeit known by different names,
such as ‘Alternate Investment Markets’ or ‘growth enterprises market’, ‘SME Board’ etc.
The global trend in recent times is towards creation of new forms of capital markets
specifically designed to meet the funding needs of SMEs.

Some of the prominent SME exchanges include KOSDAQ from the Republic of Korea, ACE
(Access, Certainty, Efficiency) Market in Malaysia, Catalyst in Singapore, Chinext in China,
Growth Enterprise Market (GEM) in Hong Kong, AIM (Alternative Investment Market) as
part of London Stock Exchange.

It is to be noted that Indian SME Capital Market has become the fastest growing market in
terms of number of companies getting listed every year. In a very short time span, Indian
SME Capital market has peaked Rs. 10000 Crores of market capitalisation.

Exchange Foundation Year Cos Listed

Indian SME Market 2012 389

(BSE and SME)

AIM (UK) 1995 1016

Chinext 2009 512

GEM (Hong 1999 234

Kong)

Report from IOSCO claims that listing cost for SMEs is cheapest in India, compared to
other countries. Even post listing expenses are minimum.

While examining the global scenario of SMEs, it is widely evident that they have been
enabling in diminishing technological backwardness and increasing the possibilities of job
creation. SMEs play a vital role in the European economies, offering 75 million jobs and
representing 99% of all the business firms. China is one of the recent examples of economic
progress brought about by the contribution of the Small and Medium Enterprises.

SMEs have been playing a crucial role in China’s economic development. SMEs have been
benefiting the economic growth of the United States through capital injections. The US
government works on their procurement policies to increase the participation of different
types of SMEs.

Taking a cue from the first world countries, the emerging economies of Asia are investing
heavily in SMEs to ensure faster and inclusive growth. Resultantly, countries like Taiwan
and Hong Kong are reaping the benefits of generating employment at the rate of 50%,
which accumulates in jobs for 1.2 million citizens.

The scenario in India is no different for SMEs. Financial crisis or economic slowdown, Indian
SMEs have always stood by the economy and have nurtured it from the roots offering
sustainability. When India restructured its economic goals, SMEs adopted the new mantra
of “Liberalization”, “Privatization”, and “Globalization” towards economic well-being.
Despite being at the forefront of the economic changes sweating it out to improve the
market sentiments, their realistic potential has remained buried behind the challenges
SMEs faces in India.

SMEs and Global Exposure

Ever since the rise of the US in the post-WWII era, it has been witnessed that SMEs are the
key players in economic growth. The argument does not even require data to support. It
was the well-accepted truth among the developed economies that the only cost-effective
avenues and access to finance for furthering the economic development is investing in
locally-owned businesses. Small and medium enterprises (SMEs) have shown great
potential in spurring economies in the US, Japan, and Germany in the last couple of
decades.
It is the SMEs, which provide the financial juices to the economy during the global
economic crisis or the recession. Promoting local businesses under global initiatives
encourage foreign as well as domestic investments in SMEs.

So far as the Indian SMEs are concerned, they are not much behind the global trajectory.
Indian SMEs have maintained a stable pace during the last decade. Evidence show that
SMEs have been pivotal and can become as competitive as core business sectors in India;
like the role SMEs play in the first world countries – the US, Germany, and the UK.
Indeed, the environment is challenging in India given the fact that SMEs have their
fundamentals stuck in regulatory hurdles and financial incompetence. The potential of the
SMEs in India paints a different picture compared to the reality. Up against the challenge,
global opportunities are immense squaring up the losses.

When exposed to the global platform, the SMEs in India will have a vast market to serve
and a developed distribution network. On the part of the labour, there is a major gain to
ponder about. Indian SMEs will be able to tap the affordable skilled labour. However,
blossoming in such a conducive environment isn’t easy for SMEs. This requires the
government of India to shred the archaic regulations allowing Indian SMEs to deal directly
with the international businesses.

Direct global connect will allow Indian SMEs the much-needed access to finance to support
their business activities and to take the burden off the Indian financial system, which is any
way reluctant to invest freely in SME sector.

Indian Scenario of SME Exchange

SMEs contribute towards 45% of manufactured output and 40% of exports. However, it
faces the problem of finance which is proving to be a limiting factor to their growth. Indian
SMEs must compete with the global players and they need capital at low cost. To promote
the development of SMEs and equip them with proper finance tools, the Government of
India initiated the idea of a separate exchange for the SMEs for raising capital. At present,
there are only two SME Exchanges in India i.e. BSE SME platform (BSE) and EMERGE
Platform (NSE). Both the exchanges have their own eligibility norms in addition to SEBI
norms for listing.

NSE SME Platform

NSE SME Platform is a credible and efficient market place to bring about convergence of
sophisticated investors and emerging corporates in the country. It offers opportunities to
informed investors to invest in emerging businesses with exciting growth plans, innovative
business models and commitment towards good governance and investor interest. The
companies listed on NSE Emerge were through book building.
EMERGE have customised processes and systems which helps prospective issuers in their
journey of metamorphosing into listed public companies. This platform provides capital
raising opportunities to credible and fast-growing businesses with good governance
standards. It is an ideal platform to raise funds for companies on a growth path, but not
large enough to list on the Main Board.
BSE SME Exchange
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 immense opportunity to the
investors to identify and invest in the good SME companies at early stage. It helps unleash
the valuation of the company and in the process create wealth for all the stakeholders
including investors.
The BSE SME was established with just one company on board, however over a period,
several other companies took the medium of BSE SME exchange to get listed in the capital
markets. Till date, 254 companies have been listed on BSE exchange, of which 50
companies have grown enough to migrate to the main board after completion of existing
rules and regulations laid down by the exchange.
BSE SME platform has helped the listed SMEs raise 2406.14 crores from the capital markets
The BSE SME Platform offers entrepreneurs and investors an environment, which enables
the listing of SMEs from the unorganized sector scattered throughout India, into a
regulated and organized sector

Role of Government
Growing SME platforms provide growth platform for emerging SMEs which in turn
contribute to developments of State economies. Various State Governments are taking
several initiatives to support fast flourishing SME platforms.
While Gujarat and Rajasthan State Governments have announced subsidy towards IPO
expenses, Maharashtra and West Bengal have set up funds to invest in SME IPOs.
Maharashtra government has also come forward In supporting these SMEs. State-run SIDBI
(Small Industries Development Bank of India) and Maharashtra Government have set up a
Rs 200 crore venture capital fund, with a view to providing easy financing options to micro,
small and medium entrepreneurs (MSMEs), which traditionally face hurdles in formal
sources of funding. The MSME & Textiles Department, Government of West Bengal is
launching a Rs 200-crore West Bengal MSME Venture Capital Fund. While the state
government commits to provide Rs 100 crore to this fund, another Rs 100 crore is to be
mobilized from other investors.
If we look at the statistics, highest number of SMEs is listed from Maharashtra and Gujarat,
compared to other states. Even SMEs of Rajasthan and West Bengal are also moving
rapidly.
Other State government should also unleash encouraging initiatives to support their SMEs
for raising growth capital on SME bourses. With such growth funding becoming easy, SMEs
are expected to progress in their businesses faster and in turn contribute to State
economies.
SME IPO
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 50% 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.
SME is a separate platform opened by Stock Exchanges in India to help SMEs to raise fund
through investors in stock market.
SME stocks to get listed and being traded on exchange, company must come up with an
Initial Public Offer (IPO) at exchange’s SME platform. IPO is one of the popular way for
companies to raise fund from investors and get listed on exchanges.
Small and Medium Enterprises (Generally called as SMEs) are the backbone of any fast-
developing economy. And India is no exception! SMEs have been playing a vital role in
growth of Indian economy. SME, as a segment, has been the fountain head for numerous
products and innovations for Indian and international markets.

Despite of impressive potential, SME sector faces several challenges. One of the biggest
challenges for SMEs is funding. SME funding is trapped in its traditional way of financing,
like debt funding, government grants etc. A report of IOSCO (International Organisation of
Securities Commission) on SME Financing through Capital Markets, claims that SMEs (60%
worldwide) rely on bank loans as their primary source of financing.

Following the recommendation of the Prime Minister’s Task Force in June 2010, to provide
a platform for raising growth capital, SME Exchange platforms were launched by BSE and
NSE in 2012 for companies with paid up capital of up to Rs. 25 Crores. Indian SME Capital
Market has since come up a long way.

SME IPO CRITRIEA ON BSE PLATFORM

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

 Net worth (excluding revolution reserves) of at least Rs. 3 Crores as per the latest
audited financial results.
  Track record of distributable profits according to section 123 of the companies Act
2013 for at least 2 years, of the immediately preceding 3 years (each financial year
must be a period of at least 12 months). Extraordinary income will not be considered
for calculating distributable profits or net worth of at least Rs. 5 Crores.

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

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

 The company should mandatorily have a website.

 The company should have no change in the promoters in the preceding one year
from the date of filing its application on BSE for listing on SME segment.

Broking Companies

 Net worth of minimum Rs.15 Crores (should comprise of equity and reserves and
surplus.

 Aggregate profit before tax of Rs 5 Crore for 2 consecutive years, (Each financial year
should be of a period of 12 months). Extraordinary income will not be considered for
profits.

 Net tangible assets of at least Rs 3 Crores as per the latest audited financial results.

 The post-issue paid up capital of the company should be minimum Rs 3 Crores.

Micro Finance Companies

Micro finance companies, in addition to the existing criteria for all SME companies, should
have a book value of at least Rs 100 Crores. Client base of 10000 & above and it should not
have accepted / held public deposit.