Small and medium enterprises (SMEs) have been the backbone of most emerging economies, including India. These SMEs contribute 45 per cent of the country’s industrial output, 40 per cent exports, 80 million jobs, and constitute a bulk of industrial units. The market capitalisation of the segment has more than doubled since January 1, 2013 to Rs 7,317 crore at present. Making things better, the government has also set up a Rs 10,000 crore fund to support the sector this year.
Some SMEs in Japan and China have over the years emerged as multinational corporations. Unlike large companies, which are pre-dominantly capital intensive, SMEs provide more employment, which is crucial in high-population nations like India. Yet, the sector remains vulnerable and was the hardest hit following the 2008-09 global economic downturn.
Credit remains a problem for the sector as it is neither cheap nor easily available, say sector specialists. With this backdrop, SME exchanges at BSE Ltd and NSE are beginning to provide some succour to SMEs that can potentially open a large untapped source of capital.
Since March 2012, the BSE has enabled 63 SMEs to sell shares to investors and raise capital for expansion of their businesses. The experience was a pleasant surprise for Harpreet Singh Malhotra, a Delhi-based entrepreneur. “We never knew listing would help our business grow so much and significantly improve our credibility,’’ says a delighted Malhotra, who is the managing director of Tiger Logistics (India) Ltd. We started getting higher credit limits, our accounting systems got streamlined and the confidence level of our employees soared.’’
The 42-year old son of an Indian Navy officer, Malhotra started his logistics company in 2000 after working with import-export companies. Tiger Logistics raised Rs 7.5 crore selling shares in August 2013 to finance its working capital. After the mandatory two-year listing on the BSE SME exchange, Malhotra aspires to get his company listed on the BSE main exchange. Tiger last traded at `85 a share. The company’s income in March 2014 was Rs 147 crore, up from Rs 122 crore a year earlier.
Mumbai-based Harshad Thakkar is equally delighted with the BSE. His small scale venture Ashapura Intimates Fashion Ltd, which he started in 1999, makes lingerie and intimate apparel branded Valentine and N-Line. We were getting offers from private equity investors but we wanted to go public for visibility and get more stakeholders,’’ he says. It’s easier to stand out on the SME exchange rather than list on BSE main board exchange and get lost among 5,000 other companies. Having gained the initial exposure we hope to graduate to BSE by next April,’’he added.
Thakkar’s Ashapura raised Rs 21 crore, selling shares at Rs 40 a piece to 500 investors in April 2013. The shares today trade at Rs 132.50. The company has invested the money in expansion, branding and retail. The company’s turnover touched Rs 198 crore in March 2014 from Rs 131 crore the previous year.
As satisfied as the SMEs is BSE’s managing director Ashish Chauhan. He expects the number of companies listing on BSE to rise to 100 by the year end from the present 63. As many as 74 SMEs have filed their share sale documents with the BSE for approval. The pool of companies which could potentially tap this avenue runs close to almost one lakh, he says. Yet, he proceeds with caution.
During the first boom of 1990-92, several small companies got listed but didn’t perform well for a variety of reasons and withdrew, so many of them got the bad name of vanishing companies’,’’ says Chauhan. Post the global crisis of 2008, it became very difficult for these companies to raise funds. So far, it’s a small but good beginning.’’
Regulators have put in some safeguards. SMEs can sell shares only to informed investors who have to bid a minimum `1 lakh. Also, two-way price quotes have to be offered for at least two years by market-makers to provide investors’ liquidity and an exit route. So far, 63 companies have raised a total of `570 crore. The BSE IPO index, which from 100 on August 2012 base, has today risen to 902.
The National Stock Exchange too is in the process of interacting with clusters of SMEs and has asked Crisil to do due-diligence to add to the comfort of investors, says Ravi Varanasi, the chief for business development at NSE. Its SME platform, named Emerge, has about half a dozen companies listed so far.
SMEs are perennially stressed for capital,’’ says Varanasi. The platform provides an opportunity to raise capital from informed investors so that the growth path can be financed from one’s own capital and from those of the risk investors.’’
In Varanasi’s opinion, there is a greater requirement for funds from manufacturing companies. Also, several angel investors - or affluent investors who fund early stage projects as high-risk, high-reward—are looking for good companies to invest in.
SMEs don’t get much credit from buyers and banks ask for 2-3 times collateral for giving loans,’’ says Chandrakant Salunkhe, President, SME Chamber in Mumbai. Companies that have got listed are from sectors like movies and entertainment, aluminium, I-T, textiles, real estate, engineering, among others.
These entrepreneurs can grow by collecting funds from market and can share rewards and risk with the new partners. They are getting used to regulatory discipline while they are still young,’’ says Chauhan. It’s a good beginning. We look forward to some of these companies emerging as the next Infosys or Wipro and that will be a measure of our success,” he adds.