Small- and medium-sized companies rush to list on Bombay Stock Exchange's SME platform

About two-and-a-half years ago, Nishita Sheth decided to set up a chain of cosmetic clinics. The Mumbai-based cosmetologist had been encouraged by the success of her clinic in the upscale Bandra suburb. "Cosmetic surgery is a very lucrative business," she says. Sheth founded Monarch Health Services along with two business partners and mobilised some money with the help of friends and relatives. But that was not enough. The consultant she hired for the expansion, Libord Advisors, suggested selling shares on a new platform that the Bombay Stock Exchange (BSE) had recently set up for small and medium enterprises (SMEs). In May 2012, a couple of months after the SME Exchange was launched, Monarch raised Rs 12 crore through an initial public offering and became only the second company to list on the platform. Monarch, later renamed Looks Health Services, now runs five clinics - two each in Mumbai and Goa and one in Delhi - and plans to open many more.

Looks Health is now among 57 companies listed on the SME Exchange, with 36 joining the platform in 2013/14 alone. And, 14 more are likely to join the bourse in next two months. The considerable interest the SME Exchange has generated is in sharp contrast to the main bourse where only three companies were listed in the year through March. The BSE's SME IPO index is up eight-fold at 834.61 as of May 12, 2014, from its base in December 2012, and companies listed on the SME platform now have a combined market value of nearly Rs 6,600 crore. The SME Exchange also boasts companies from an interesting mix of sectors -- from digital advertisers and travel operators to non-banking finance companies and departmental stores.

The BSE is not the only bourse in India with a separate platform for SMEs. On the same day the SME Exchange took off with the listing of non-banking finance company BCB Finance in March 2012, the National Stock Exchange also announced the launch of its SME platform called Emerge. Both these platforms are similar to London's Alternative Investment Market, or AIM, in that they seek to help small, growing companies that typically rely on expensive bank lending to mop up equity funding to meet their working capital requirements or expand their businesses. But, while the 20-year-old NSE has overtaken the 149-year-old BSE as the country's largest bourse overall, the Emerge has managed to attract only five companies since its launch.

The surge in the number of SMEs tapping the capital market coincides with a slowdown in bank lending as their bad debts soar. Deep N. Mukherjee, Senior Director (Corporates) at India Ratings & Research, says incremental lending by banks to SMEs has decreased in recent months. Credit to medium-sized companies, for instance, declined 6.1 per cent year-on-year in January, he adds. Ashishkumar Chauhan, Managing Director and CEO of the BSE, says equity financing reduces the debt burden, leading to lower financing costs and a healthier balance sheet.

Besides raising funds at a low cost, there are other reasons as well that are prompting companies to list on the SME Exchange. Given that the main bourse has more than 5,300 companies, the SME platform offers a better chance of catching the attention of investors. "A listing enhances an SME's visibility and can improve its profile and credibility," says Chauhan. Raghavendra Joshi, Founder of R J Biotech, concurs. The seeds producer is the first company from Aurangabad, Maharashtra, to debut on the exchange after raising Rs 5 crore in September 2013. Joshi, who found out about the exchange through newspaper articles and the Internet, says the listing process was a bit tedious but helped the company improve its corporate governance practices. The SME Exchange helps create a brand identity and boosts the confidence of its stakeholders, he adds.

Harshad H. Thakkar, Chairman and Managing Director of Ashapura Intimates Fashion, says the SME platform was just the right fit for the company. "It's very cost effective to get listed on the SME Exchange instead of the main bourse," he says. The maker of loungewear, night wear, bathrobes and lingerie raised Rs 21 crore through its share sale and listed in April 2013. The issue was subscribed two-and-a-half times and received funding from institutions such as the Small Industries Development Bank of India. Ashapura is one of the best performers on the SME Exchange. Shares of Ashapura are trading around Rs 127, up more than three-fold from its issue price of Rs 40. Overall, 44 of the 57 companies are trading above their issue price, indicating most investors have made money on their investment. (see Top Performers).

Sanjay Aggarwal, Partner and Head of Mid-Markets at KPMG in India, says there are many wealthy investors in the country who are looking at funding SMEs where risks - and returns - are typically higher than in larger companies. "Wealthy investors are willing to invest in multiple companies to spread the risk and hope that even if one company works, they will earn significantly higher returns," he says. Pankaj Chadha, Partner in a member firm of Ernst & Young Global, says investors look at similar performance parameters for SMEs as in the case of main bourse companies, although with medium- to long-term perspective. He adds that the SME platform is mainly meant to attract wealthy investors and institutions considering that the minimum amount that can be invested is Rs 1,00,000. But Ashapura's Thakkar feels that the cap discourages retail investors, who hesitate to invest such a big amount in one company.

Will companies continue to flock to the SME Exchange?

The SME platform is still young and being tested by both companies and investors. Sheth of Looks Health says the SME Exchange is a good platform for small companies to raise capital but cautions that a company should judge the investment climate before taking a listing call. Citing her own experience she says, "As we were the second company to list on the exchange we expected a good response, but we had to struggle and our issue could just manage to get subscribed."

Inadequate liquidity is also a matter of concern because not all companies are traded every day. Low trading volume, in fact, was the main reason for the failure of the OTC Exchange of India, the first bourse aimed at SMEs that began operations in the early 1990s. Another worrying factor is excessive volatility. Shares of Looks Health, for instance, have slumped 75 per cent since December after almost doubling in the previous six months. KPMG's Aggarwal says the main challenges for SMEs would be to establish their credibility and improve governance. "The track record over the next one or two years will determine whether the exchange will work or not," he says. "It will be interesting to see how SMEs manage the increased cost of governance."

Despite the challenges, analysts feel the SME Exchange has potential for growth. The bourse is surely doing its bit to lure more SMEs. In October last year it started an institutional trading programme that allows start-ups and SMEs to list on the exchange without an initial public offering if they meet certain conditions. The efforts are bearing fruit, and many many other companies are considering listing on the bourse. These include Starlit Power Systems, which makes and recycles lead products; Sirohia & Sons, a supplier of fertiliser to tea producers; and education services provider Learning Edge Academy of Professionals. BSE's Chauhan says 15 companies from Aurangabad showed interest in listing after R J Biotech made its debut.

Some companies plan to use it as a stepping stone to prepare for a listing on the main bourse. One such company is Prabhat Telecoms, one of the biggest distributors of the Micromax brand of mobile handsets, which plans to raise about Rs 27 crore. "Once listed, we will not have to explain to every individual about the company's valuation anymore," says Chairman V.M. Tiwari. The company has an option of listing on the main bourse considering its annual revenue of Rs 258 crore makes it big enough to debut there. But Tiwari says a listing on the junior exchange will give the company the required experience and confidence before migrating to the main bourse. "I strongly recommend all small companies to list on the SME Exchange," he says. "Use this experience as net practice before playing the big match."