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Rajan Bhatia

Rajan Bhatia is a Senior Chartered Accountant and alumnus of prestigious Shri Ram College of Commerce. He is Founder and Managing Partner of Rajan Bhatia & Company, Chartered Accountants and Global CFO with over 20 years experience in enabling financial success and wealth creation in reputed corporates, SMEs and startup companies.

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Creating Unicorns - Startup Idea to IPO - Funds Raising & Wealth Creation for Startups and SMEs

Venture capital investments in India reached INR 15,600 crore (US$ 2363) till June 2015, surpassing the total INR 14,850 crore (US$ 2250) invested in entire 2014, setting the stage for another record year as interest in local technology startups peak.

Photo Credit : lifeteen.com,

Looking to take your Startup company to next level ?

SME listing on Stock Exchange--A new source of raising equity capital, maximizing value & wealth creation for Startups and SME companies.

Forward & Executive Summary:

For growing STARTUPS and SME companies seeking to raise capital, an SME listing can be a superior route to  growth. Recently developed SME stock exchange platforms provide a great opportunity to the STARTUPS and SME entrepreneurs to raise equity capital for the growth and expansion. SME exchange listing will help unleash the valuation of STARTUPS and SME companies and in the process create wealth for all the stakeholders, besides enormous income tax benefits. STARTUPS and SMEs have the potential to grow into big companies, provided they get adequate capital support. The STARTUPS and SMEs now have the great opportunity to grow into big public listed companies by getting themselves listed on a SME stock exchange.  We hope that this concise article will help STARTUPS and SME owners to be well prepared to transform their STARTUPS and SME company into a successful and wealthy public listed company that continually delivers maximum value and creates wealth for its shareholders.

STARTUP and SME Sector - The next big revolution across the globe.

Stand up India, Startup India, Make in India, Digital India are some of the great initiative taken by the Government of India which provides enormous benefits to startups, SMEs as well as large companies. India is the world’s 3rd largest and world’s fastest growing startup ecosystem anywhere in the World. The numbers are telling—from 3,100 startups in 2014 to a projection of more than 11,500 by 2020… Startups is certainly not a passing trend. SMEs are not small and medium any more. In fact, SMEs are Smart and Multi-talented Enterprises.

Venture capital investments in India reached INR 15,600 crore (US$ 2363) till June 2015, surpassing the total INR 14,850 crore (US$ 2250) invested in entire 2014, setting the stage for another record year as interest in local technology startups peak.

Around 9 billion apps will be downloaded in India in 2015, more than five times the number of apps downloaded in 2012 (1.56 billion). Source: Deloitte India’s TMT Predictions 2015 report.

Revenues from paid apps estimated to exceed USD 227 million in 2015, up from USD 136 million in 2014 due to increase in app usage on smart phones.

India's m-Commerce market to reach USD 19 billion by 2019.

Mobile Gaming market in India to cross USD 571.6 million by 2016.

World over, dedicated SME trading platforms or exchanges are prevalent. Some of the known stock markets for SMEs are AIM (Alternate Investment Market) in UK, TSX Ventures in Canada, GEM (Growth Enterprise Market) in Hong Kong, MOTHERS (Market of the high-growth and emerging stocks) in Japan, Catalist in Singapore and the latest initiative in China – Chinext and very recent in India as BSE SME and NSE Emerge. As a matter of fact, NASDAQ also started as an SME exchange.

The need for SME Exchange in India for growth of STARTUPS and SMEs--There are enormous benefits to STARTUPS and SMEs. The Top 10 key advantages to STARTUPS & SMEs for SMEs listing are stated below:

1. Easier access to equity capital and better funding opportunities:

Going public provides STARTUPS and SMEs with the equity financing opportunities to grow their business from operations to expansion to inorganic acquisitions. Access to equity financing lowers the debt burden leading to lower financing costs and healthier and wealthier balance sheets.

2. Enhanced Value creation:

Valuation of a company is determined by many factors, one of which is class of company-whether public listed or private limited. Going for a public issue of capital will enhance the company's visibility. Greater public awareness gained through media coverage, publicly filed documents and coverage of stock by sector investment analysts will provide the STARTUPS and SMEs with greater profile and credibility. This can result in more diversified groups of investors, which may increase the demand for that company's shares leading to an increase in the company's value and enhanced value creation.

3. Balanced Risk Management for promoters:

SME listing will help STARTUPS and SME promoters and owners to distribute the risk of business efficiently. Listing the company would facilitate expansion of the investor’s base, which in turn help company get secondary market for equity financing, including private placement.

4. Easier and efficient entry and exit platforms for Private Equity and other strategic investors leading to increased participation from private equity investors:

The presence of a market-driven transparent trading platform provides with a ready and easy entry and exit for strategic investors. Listing not only offers the investors flexibility for entry and exit, but also the confidence required for any such transactions.The listing would result in an increased participation by venture capital players as they would have a ready, transparent and tax-efficient exit route.

5. No long term capital gain tax:

Normally, transfer of unlisted shares attracts long term capital gains tax of 20% and short term capital gains of up to 30%. Whereas in case of listed shares, tax on long term capital gains is nil and short term capital gains is 15%, provided the transaction has been subjected to securities transaction tax (STT). This preferential tax treatment on transfer of listed shares is also available to shares listed on SME Exchange. Listing on SME Exchange is a valid tax-planning tool and could, thus, lead to enormous tax saving for STARTUPS and SME entrepreneurs & investors.

6. No tax on fresh equity infusion in the company:

Recently the Finance Act, 2012 imposed a tax liability on fresh issuance of equity shares by an unlisted company to investors other than "Registered Venture Fund", if the issuance is made at a value more than the fair value. This could make STARTUPS and SMEs subject to heavy tax outgo, since they often go for fund raising through equity issuance to investors. Such a tax liability, however, does not attract if the shares of the company are listed on recognize stock exchanges, including SME Exchange.

7. STARTUPS and SME corporate image creation, better visibility and strong Brand Building:

Going for a public issue is most likely to enhance the company's visibility. Greater public awareness gained through media coverage, and research coverage by sector investment analysts provide the STARTUPS and SMEs with greater visibility and help brand building which otherwise may remain a dream especially for STARTUPS and SMEs.

8. SME listing on stock exchange can facilitate growth through strategic investments and SME Mergers and Acquisitions:

The STARTUPS and SME companies in their effort to have forward or backward integration for growth and expansion may take a strategic stake in other STARTUPS & SMEs. Domestic & International investors repose faith in listed STARTUPS & SMEs. Listed STARTUPS & SMEs are likely to get strategic investments from both, domestic and international investors as well as from private equity and strategic investors. Instead of a direct cash offering, using shares for an acquisition can be a tax- efficient and cost- effective vehicle to finance such a transaction.

9. Incentive mechanism for employees :

ESOPs and any other share-based compensation plan of listed company have an immediate and tangible value to employees. This, in turn, serves as a talent retention tool.This can serve to ensure stronger employee commitment to the company's performance and success.

10. Strong Corporate governance & financial controls:

Though the requirements for a company listed on SME Exchange are not as stringent as that for Main Board listed companies, nevertheless SME listing ensures that the company has drawn up the internal control systems and set up minimum required framework of corporate governance. This, in turn, lends sustainability to the business.

Conclusion:

The SME listing window of opportunity is now open for STARTUPS and SMEs. Advance preparation & planning are critical. Lack of preparation and proper planning can jeopardize an SME IPO. SME Listing and brining IPO is a long process and involves enormous amount of work and planning like building an equity story, strong financial results, timely and accurate financial and accounting information, strong internal controls, qualified management team, corporate governance and investor’s relations.


Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house



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