The SEBI introduced the concept of SME-IPO in 2012 to help provide Small and Medium Enterprises in India with funds to help grow their start-ups and businesses. Start-ups and SMEs are the backbones of India’s economy, and quite a few of them have gone on to become International companies with the right investors and growth plans.
The Indian government is very supportive of SMEs and has many programs in place to support their growth, including the SME-IPO initiative. Both NSE and BSE platforms now allow investors to invest in SMEs showing potential on the Emerge and BSE-SME platforms, respectively.
What is the Institutional Trading Platform (ITP)?
In 2013, the SEBI announced the introduction of the Institutional Trading Platform (ITP), which would simplify the investing process and help SMEs secure funding without going through the entire process of putting out an IPO. To be able to offer an IPO to the public, companies usually have to go through a long and complex registration process, following which their shares would be available to the public to trade in.
The Institutional Trading Platform was developed to help SMEs procure funds from early investors and promoters in an easier way. One advantage of the Institutional Trading Platform is that it locks in capital from venture capitalists, angel investors, and other promoters for only 6 months- compared to the standard period of 3 years for an IPO. This encourages more investors to put their money towards the SME of their choice, as they can pull the funds whenever they want.
Listing on the ITP is also easier on the SMEs, as they do not have to draw up complex and elaborate plans or explain how every rupee will be spent to their investors but can list on looser terms.
Eligibility criteria for listing on an Institutional Trading Platform
There are certain requirements that an SME must meet before being permitted to list itself on the Institutional Trading Platform-
- 1. The company must have received at least 50 lakh rupees in equity investments from venture capital funds, alternative investment funds, angel investors, or other types of investors or lenders, or it must have received financing from a merchant banker for its working capital needs or project finance needs in the previous three years. Alternatively, a registered merchant banker or a qualified institutional buyer may have invested at least 50 lakh rupees in equity investments, and their shares will trade on a registered market.
- The company, board of directors, and promoters must not be willful defaulters, sick companies that have been referred to the Board for Industrial and Financial Reconstruction within the past five years, companies that have had winding-up petitions against them accepted by courts, or companies against which regulatory action has been taken within the past five years by the RBI, IRDA, SEBI, or Ministry of Corporate Affairs.
- Either the company’s paid-up capital is no more than 25 crores or its revenues in any prior fiscal year did not exceed 100 crores.
Exchange requirements (BSE
SME ITP): The firm must have a minimum net tangible asset of one crore rupees or net income that is at least fifty lakh rupees.
- The company’s promoters have remained the same since the application filing date for the last year.
- If a merchant banker has invested in the firm, the merchant banker is required to present a due diligence certificate in a certain format.
- Other requirements include that the firm has an audited financial statement for the preceding fiscal year and that its incorporation date is no more than ten years ago.
How can a company list itself on an Institutional Trading Platform?
The SME has to follow certain steps to get itself listed on an Institutional Trading Platform-
- The business must submit an application to the ITP in a predetermined format that includes all required disclosures on its finances, assets, promoters, and other pertinent information.
- Other necessary papers must be included with the application (See Detailed checklist of documents to be submitted for listing).
- The board of directors must approve both the draught and final disclosure papers before they may be signed by the managing director, the chief financial officer, or anyone else in charge of the company’s financial operations.
- The disclosures will be available for at least 21 days on the stock exchange’s website. However, compared to an IPO, this disclosure is significantly easier, less burdensome, and involves very little regulatory engagement.
- The stock exchange may provide such listings in-principle permission. For the specific purpose of listing on ITP, a firm shall be assumed to have waived the requirement to comply with rule 19(2)(b) of the Securities Contracts (Regulation) Rules, 1957, when it receives in-principle permission for the listing of such securities.
- If the application conforms with the guidelines and has the previous permission required by the company’s by-rules, the stock exchange may approve listing the securities in the ITP.
- The firm and the Institutional Trading Platform will engage in a listing agreement when the ITP grants its approval.
Following this, the central depositories, the National Securities Depository Ltd (NSDL) and Central Depository Services Ltd., both require the listed businesses to sign with them (CDSL).
Once an SME is listed on the ITP, there are certain conditions that it must follow-
- Once it is listed, it cannot offer its securities to the public.
- It cannot apply for an IPO as long as it is present on the ITP.
- Securities can only be exchanged through Demat accounts.
- The minimum value of one trading lot should be Rs 10 lakh.
- Promoters and investors in the company must hold more than a 20% stake in the company’s capital after it is listed.
- The promoters can withdraw their funds after the lock-in period of 6 months.
How long can an SME stay on the Institutional Trading Platform?
In case the company has been present on the ITP for
- More than 10 years
- Now has a paid-up capital of more than 25 crores
- Has a market capitalization of more than 500 crores
- Has generated a lifetime revenue of more than 300 crores at that point,
then the SME will have to exit the Institutional Trading Platform without exceptions.
Following this, it can prepare to register for an IPO and to list itself as a mainboard company if it wishes to.
If an SME wishes to remove itself from the Institutional Trading Platform, it must seek the approval of its shareholders as well as the stock exchange on which it is listed.
The stock exchange can also cancel the company’s listing if it has violated any rules related to listing or non-compliance with corporate governance norms over a year.
The Institutional Trading Platform was developed to make it easier for SMEs to gain funding without having to go through all of the complex formalities of registering to offer an IPO. Though it is easier for SMEs to list themselves on an Institutional Trading Platform, there are certain criteria they must fit in to qualify for it, as well as rules and guidelines they must follow once they are listed.
ITPs work differently from the mainboard stock exchange and are usually in favour of larger investors like venture capitalists and angel investors rather than the general public, as it was opened for the betterment of the SMEs.