What is the legal framework for public offering of securities by SMEs?
The legal framework for the public offering of securities by SMEs is primarily contained in the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2009 (“ICDR Regulations”), SEBI press release dated November 9, 2009 and SEBI circulars dated April 26, May 17 and May 18, 2010.
Who can issue securities under the legal framework for public offering of securities by SMEs?
An issuer whose post-issue face value capital does not exceed ten crore rupees can issue securities in accordance with Chapter XA of the ICDR Regulations. An issuer whose post issue face value capital is more than ten crore rupees and upto twenty five crore rupees can also issue securities in accordance with Chapter XA of the ICDR Regulations. The second category of issuer may migrate its securities from the SME exchange to the ‘Main Board' (a recognized stock exchange having nationwide trading terminals, other than SME exchange) if its shareholders approve such migration by passing a special resolution through postal ballot to this effect and if such issuer fulfils the eligibility criteria for listing as laid down by the ‘Main Board’.
Further, an issuer listed on a recognized stock exchange other than a SME exchange and whose post-issue face value capital pursuant to further issue of securities of the same class does not exceed ten crore rupees will have option to make further issue of specified securities of same class in accordance with Chapter XA of the ICDR Regulations provided that its entire specified securities of the same class shall be listed on the SME exchange.
Where are securities, issued by SMEs pursuant to ICDR Regulations, listed?
Securities issued by SMEs pursuant to the ICDR Regulations are required to be listed on a SME exchange.
What is a SME exchange?
Regulation 106B (1) (c) of the ICDR Regulations defines SME exchange to mean a trading platform of a recognised stock exchange having nationwide trading terminals permitted by the SEBI to list the specified securities issued in accordance with chapter XA of the ICDR Regulation and includes a stock exchange granted recognition for this purpose but does not include the ‘Main Board’.
What is the legal framework for setting up of a SME exchange?
SEBI, through a circular issued in May 18, 2010 superseding a guideline issued earlier in November 5, 2008, laid down the framework for recognition and supervision of stock exchanges or platforms for SMEs. For the listing of securities issued by SMEs, either a dedicated stock exchange for SMEs can be set up or an existing stock exchange can set up platform for the SME sector. A new stock exchange or a platform can be set up after applying to Market Regulation Department, SEBI in accordance with the provisions of the Securities Contracts (Regulation) Act, 1956 and Securities Contracts (Regulation) Rules, 1956 subject to the applicant fulfilling certain conditions such as corporatisation of the stock exchange, minimum balance sheet networth of Rs. 100 crores, nationwide trading terminals and an online screen based trading system etc.
What are the important differences in the process of offering of securities under the SME legal framework as opposed to offering of securities under the non-SME legal framework of the ICDR Regulations?
· The SMEs issuers, making a public issue or a rights issue, are not required to file the draft offer document with SEBI.
· While filing the prospectus with the SME exchange, they are required to file a copy with the SEBI on which SEBI will not issue any observation.
· The underwriting shall be for the entire hundred percent of the offer through the offer document and shall not be restricted upto the minimum subscription level
· The merchant banker shall underwrite at least fifteen percent of the issue size on his or their own account.
· The minimum application size in terms of the specified securities shall not be less than one lakh specified securities.
· Further no allotment shall be made pursuant to any initial public offer if the number of prospective allottees is less than fifty.
Further, SEBI has made the process of market making mandatory in a SME public offerings and the responsibility is on the merchant banker to ensure compulsory market making through the stock brokers of the SME exchange for a minimum period of three years from the date of listing of the specified securities. Pursuant to a SEBI circular dated April 26, 2010, SEBI has laid down the norms for the market makers involved in the process of market making such as registration of the market makers, the obligations and responsibilities of the market makers, risk containment measures and monitoring of market makers etc.
Is migration from a SME exchange to the Main Board and vice versa permitted?
The ICDR Regulations permits migration of companies to SME exchange or migration to the Main Board.
Is there a listing agreement in place for listing of securities on a SME exchange?
Pursuant to a circular dated May 17, 2010, SEBI specified the model SME equity listing agreement containing of listing for issuers seeking listing on SME exchange.
What are the differences in the model listing agreement for listing on a SME exchange upon comparison to the listing requirements in Main Board?
Some relaxations are provided to the issuers whose securities are listed on SME exchange in comparison to the listing requirements in Main Board, which inter-alia include the following:
· Companies listed on the SME exchange may send to their shareholders, a statement containing the salient features of all the documents, as prescribed in sub-clause (iv) of clause (b) of proviso to section 219 of the Companies Act, 1956, instead of sending a full annual report;
· Periodical financial results may be submitted on “half yearly basis”, instead of “quarterly basis” and
· SMEs need not publish their financial results, as required in the Main Board and can make it available on their website.
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