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Listing of Shares by SMEs Without an IPO

SME raise funds through ITP

SEBI has provided with a platform for SMEs accessing capital by issuing IPOs on the SME Exchange and the regulations in this regard have been in place for about 3 years. BSE and NSE have started SME Exchanges; however, number of SME scrips listed on the SME Exchanges has been only a handful and that too with a very low trading volume. SEBI has now issued regulations allowing listing of SME scrips without a public issue on Institutional Trading Platform (ITP, in short). The move has been aimed at institutional investors (like venture funds (VCFs) and other alternative investment funds (AIFs)) finding value for their existing investments or for SMEs assessing investor acceptability of their company’s worth, before future IPOs could be thought of.

SEBI regulations for listing on ITP by SMEs without IPO

SEBI regulations for listing on ITP lays out some criteria with regard to eligibility that can be broadly grouped under vintage, size, governance and involvement of some types of institutions pre- or post-listing to ensure that proper due-diligence is carried out and adequate governance standards are maintained post listing. The same are

a)      Vintage criteria, as on the date of application for listing on an ITP, with at least one year’s audited financial results and not being in existence for more than 10 years;

b)      Size criteria (in any of the previous years since incorporation), the revenues and paid-up capital shouldn’t have exceeded Rs. 100 crore and Rs. 25 crore, respectively;

c)     Governance criteria where the company, its promoter, group company or any of the directors do not appear in the willful defaulters list of RBI as maintained by CIBIL; there has been no winding up petition pending against the company; the company or any other entity in its group have not been referred to the BIFR in the past 5 years; and no regulatory action has been taken against the company, its promoter or any of its directors, by SEBI, RBI, IRDA or Ministry of Corporate Affairs in the past 5 years;

d)      Due diligence assurance criteria in the form that the Company should have at least one Alternative Investment Fund or AIF in short (VCF or other category of investors / lenders) should have invested at least Rs. 50 lakh in equity shares of the company; or at least one angel investor who is a member of an association/group of angel investors who fulfill the criteria laid down by the recognised stock exchange, has invested at least Rs. 50 lakh rupees in the equity shares of the company through such association/group; or the company has received working capital or project finance from a scheduled bank and a period of 3 years has elapsed from the date of such financing and the funds so received have been fully utilized; or a registered merchant banker has exercised due diligence and has invested not less than Rs. 50 lakh rupees in equity shares of the company which shall be locked in for a period of 3 years from the date of listing; or a QIB has invested not less than Rs. 50 lakh in the equity shares of the company, which shall be locked in for a period of 3 years from the date of listing; or a specialized international multilateral agency or Company defined under section 4A of the Companies Act, 1956 has invested in the equity capital of the company;

Disconnect and gaps in the inter se due-diligence requirements

SEBI had undertaken consultations with a wide segment of merchant bankers, stock exchange representatives, venture funds, consultants and few associations representing SMEs (the author was part of these deliberations). It has, through the regulations, tried to keep a balance between the expectations of different segments. However, there does seem to be a disconnect, particularly in the due-diligence criteria, as some conditions are less stiff when compared to other conditions, for instance the condition of minimum investment of Rs. 50 lakhs by AIFs appears to be relatively stiff, even when there is no lock-in criteria for such investment post listing, when compared to raising resources (of any amount, even as low as Rs. 1 lakh) from security backed borrowings from scheduled Bank (including scheduled cooperative Bank), as can be seen from the fact that out of 35 companies listed on BSE SME platform only one has VCF investment whereas on 3 companies listed on NSE’s Emerge, 2 have VCF investment.

Also, the requirement of a registered Merchant Banker taking equity position in SMEs listed on the ITP for a minimum amount of Rs. 50 lakhs and for a minimum period of 3 years from the date of listing is out of place given that Merchant Bankers being service providers, do not require high capital. Also the fee income from handling equity issues may not be sufficient to mitigate the risk from investment in the equity capital. The condition can be exploited by unscrupulous entrepreneurs who do not fulfill any of the other criteria and are keen on laying easy claim on money from unsuspecting investors through an offline back-to-back transaction with a willing Merchant Banker.

Endnote and Few Suggestions

The requirement of compulsory grading of shares on a specific SME scale is missing. Listing of good investee companies having sound corporate governance is sine qua non for healthy development of any capital market. Information about the performance of, and governance standards adopted by SMEs is not easily available in the public domain, especially before such companies get listed. Grading of the scrips by rating agencies could bridge the information asymmetry. In the absence of grading, it’s the exchanges’ added responsibility to act as effective gate-keepers avoiding listing of fly-by-night issuers and spoiling the market.

SME Exchange and ITPs should also encourage and take the initiative of providing research reports on the companies listed. The more information about companies listed are provided, the better it would be for the companies listed and also for the investors interested in the SME scrips.

It should be acknowledged that it is humanly impossible for SEBI to keep all quarters satisfied and hence the regulations can be considered as a work-in-process in the right direction. In the meantime, it is also a recognised fact that investors would have to undertake necessary due-diligence and read the prospectus minutely and analyze the financial results more carefully before investing in the shares of SMEs. They also have to accept that the bucks would be made, in the long run. SME Exchange or ITP is not a place for quick bucks or for speculative gains!

Disclaimer: Opinions and Information given in this article are that of the author and not endorsed by

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RAJESH DUBEY was the former SME Head at ICRA. He is a Chartered Accountant & Cost Accountant with over 20 years experience in Credit & Risk Management and institution building. He has In-depth understanding of credit and risk assessment (project finance, financing NBFCs, SMEs, Corporates) coupled with an in-depth understanding of the SME sector dynamics. He has set-up 2 institutions (for guaranteeing credit to SMEs and credit rating of SMEs) which have achieved wide recognition, credibility & acceptability amongst institutional lenders, SME trade bodies and associations and Government circles. Rajesh advises national level trade associations on policy advocacy relating to financial matters concerning SMEs.

Rajesh can be contacted for any advise related to SME growth and IPO strategy at:


Article Name
Listing of Shares by SMEs Without an IPO
This article highlights various criteria which SMEs should fulfill to list shares on ITP without IPO. The SMEs now have an alternative way to raise institutional funds.