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SME Exchange – The Newest Route for MSME Financing

By Eram Shaikh --
Thursday, 07 Dec, 2023

India is home to around 63.3 million micro, small, and medium enterprises (MSMEs) which have been upheld as the growth engine of the economy. However, access to adequate and timely financing remains one of the biggest challenges facing the MSME sector inhibiting its growth potential. Of the total MSME lending in India, only around 16 per cent comes from formal or organized sources of finance. But the newest route for MSMEs to raise equity financing - the SME Exchange platform – holds strong promise to fill this gap.

SME Exchange is a dedicated stock exchange platform introduced by The Securities Exchange Board of India (SEBI) in 2012 for small and medium enterprises to get listed and raise public funds through the issue of shares. It serves as an exchange where MSMEs can directly list their company shares and enable trading of securities. This allows MSMEs to access cheaper equity financing from public investors, high-net-worth individuals etc. instead of only relying on traditional channels like bank loans.

The key benefit offered is that MSMEs can bypass stringent eligibility norms related to profitability and track record enforced by main exchanges like BSE and NSE to list and raise funds this way. The only key criteria are that the MSME should have tangible assets of INR 1 crore to INR 25 crores, annual turnover/revenue between INR 5 crore to INR 100 crores and paid-up capital above INR 3 crores.

After lacklustre initial years, the SME Exchange platform has now started gaining good traction with 70 companies already listed with total funds raised exceeding INR 500 crores. Two dedicated stock exchanges – NSE Emerge and BSE SME– act as the main SME Exchanges in India presently. They have collectively helped channel equity investments from stock markets to high-potential MSMEs at an early growth stage.

Various companies from manufacturing, logistics, pharmaceuticals and service industries are now utilizing this route which is also witnessing good investor participation. Moreover, many venture capital, angel and private equity funds are also exiting their investments in MSMEs through the SME Exchange platform by listing such portfolio companies.

Several merits make SME Exchange an attractive avenue for MSME funding needs:

Relaxed Eligibility Norms: MSMEs not meeting main exchange listing criteria can easily qualify and get listed on SME Exchange platforms much more easily thereby accessing public funds.

Cost-effective: The listing costs for shares are far lower - between INR 5-10 lakhs on SME Exchange vs. INR 20 lakhs on main exchanges - making it an affordable route.

Governance and Visibility: Aids in demonstrating better corporate governance and financial discipline. Also offers higher visibility with investors and customers.

Alternative Funding: Opens up a critical new route of equity financing for MSMEs unavailable earlier. Results in lower reliance on limited funding sources.

Growth Opportunities: Facilitates the next stage of growth for MSMEs through expansion, marketing, R&D, technology enhancement etc. powered by fresh capital secured via listings.

Industry experts project the SME Exchange route to gain even higher momentum as more MSMEs recognize the advantages of accessing public funds this way. Moreover, higher investor participation is also expected as retail investors seek to diversify their portfolios towards high-growth potential MSME stocks. Proactive government efforts to streamline procedures and norms for listing MSMEs will further propel growth. Overall, the SME Exchange Avenue promises to provide the crucial access to equity funding that high-performing MSMEs require for scaling up innovations, business expansion and driving competitive advantage. For MSMEs seeking the next growth orbit amidst a challenging environment, the SME Exchange surely represents the newest promising route for financing in India.

SME Exchange – The Newest Route for MSME Financing . India is home to around 63.3 million micro, small, and medium enterprises (MSMEs) which have been upheld as the growth engine of the economy. However, access to adequate and timely financing remains one of the biggest challenges facing the MSME sector inhibiting its growth potential. Of the total MSME lending in India, only around 16 per cent comes from formal or organized sources of finance. But the newest route for MSMEs to raise equity financing - the SME Exchange platform – holds strong promise to fill this gap.

SME Exchange is a dedicated stock exchange platform introduced by The Securities Exchange Board of India (SEBI) in 2012 for small and medium enterprises to get listed and raise public funds through the issue of shares. It serves as an exchange where MSMEs can directly list their company shares and enable trading of securities. This allows MSMEs to access cheaper equity financing from public investors, high-net-worth individuals etc. instead of only relying on traditional channels like bank loans.

The key benefit offered is that MSMEs can bypass stringent eligibility norms related to profitability and track record enforced by main exchanges like BSE and NSE to list and raise funds this way. The only key criteria are that the MSME should have tangible assets of INR 1 crore to INR 25 crores, annual turnover/revenue between INR 5 crore to INR 100 crores and paid-up capital above INR 3 crores.

After lacklustre initial years, the SME Exchange platform has now started gaining good traction with 70 companies already listed with total funds raised exceeding INR 500 crores. Two dedicated stock exchanges – NSE Emerge and BSE SME– act as the main SME Exchanges in India presently. They have collectively helped channel equity investments from stock markets to high-potential MSMEs at an early growth stage.

Various companies from manufacturing, logistics, pharmaceuticals and service industries are now utilizing this route which is also witnessing good investor participation. Moreover, many venture capital, angel and private equity funds are also exiting their investments in MSMEs through the SME Exchange platform by listing such portfolio companies.

Several merits make SME Exchange an attractive avenue for MSME funding needs:

Relaxed Eligibility Norms: MSMEs not meeting main exchange listing criteria can easily qualify and get listed on SME Exchange platforms much more easily thereby accessing public funds.

Cost-effective: The listing costs for shares are far lower - between INR 5-10 lakhs on SME Exchange vs. INR 20 lakhs on main exchanges - making it an affordable route.

Governance and Visibility: Aids in demonstrating better corporate governance and financial discipline. Also offers higher visibility with investors and customers.

Alternative Funding: Opens up a critical new route of equity financing for MSMEs unavailable earlier. Results in lower reliance on limited funding sources.

Growth Opportunities: Facilitates the next stage of growth for MSMEs through expansion, marketing, R&D, technology enhancement etc. powered by fresh capital secured via listings.

Industry experts project the SME Exchange route to gain even higher momentum as more MSMEs recognize the advantages of accessing public funds this way. Moreover, higher investor participation is also expected as retail investors seek to diversify their portfolios towards high-growth potential MSME stocks. Proactive government efforts to streamline procedures and norms for listing MSMEs will further propel growth. Overall, the SME Exchange Avenue promises to provide the crucial access to equity funding that high-performing MSMEs require for scaling up innovations, business expansion and driving competitive advantage. For MSMEs seeking the next growth orbit amidst a challenging environment, the SME Exchange surely represents the newest promising route for financing in India.