MUMBAI: The newly announced public listing norms for small and medium

enterprises (SMEs) are expected to benefit small-ticket private funds
and venture
capitalists (VCs) who are willing to make seed and growth-stage investments. Easier listings will guarantee good exit options for strategic investors in these otherwise illiquid companies, say industry experts.

Small businesses usually approach strategic investors (especially VCs) for raising working capital needs. As the sector is characterised by high processing costs, often exceeding the returns, banks are generally reluctant to extend credit to the SMEs. High failure rates, low capitalisation and vulnerability to market risks also deter financiers from funding SMEs. That’s the main reason why SMEs approach VCs and small-ticket private funds.

“The main problem faced by strategic investors is getting an exit route. With easier listing norms, companies can consider public fund raising upon reaching a decent size. This will give venture capitalists an easy exit route as well,” said Anil Bhardwaj, secretary general, Federation of Indian SMEs (FISME).

According to experts in corporate financing, seed and growth stage investments have been declining over the past few years with most VCs turning their focus on larger deals in medium-to-large-sized companies (typically acting as private equity funds in the process). Lack of exit route in SMEs and longer investment time-frame — say 8 to 10 years — were deterring VCs from making seed and growth-stage investments.

According to PE tracker Venture Intelligence, VC firms invested just about $117 million (Rs 585 crore) over 27 deals in the first half of 2009 vis-à-vis $413 million (Rs 2,065 crore) invested across 67 deals during the same period last year. However, it is not clear as to how many funds made seed and growth stage investments during the considered periods.

“Actual investments into SMEs may be be a miniscule portion of overall venture capital investments. VC firms will restart seed and growth funding once they are assured of a profitable exit option. If implemented in true spirit, we could see several investment firms redrawing their strategies around SMEs over the next few years,” says CG Srividya, partner, Grant Thornton.

Sebi has eased SME listing norms by laying down low paid-up capital requirements (at Rs 10 crore), relaxed eligibility norms applicable to IPOs and allotted market makers (through merchant bankers) for ensuring liquidity, post listing. While the intent is clear, Sebi has laid a few stumbling blocks for SMEs on the road to easier public listings. The need for adhering to Clause 49 (pertaining to the appointment of independent directors) could be the biggest impediment, say experts.

“Most SMEs are family-owned businesses or managed by single proprietors. Clause 49 will force us to appoint an equal number of external directors. This will increase our costs of doing business,” said Mr Bhardwaj. “Sebi could have kept aside Clause 49 requirements, as merchant bankers are mandated to stay invested (holding 15% equity) in the company for three years,” he added.

stocktobuy-SMEs are family-owned businesses!!Most SMEs will have to adhere to Clause 49 to appoint an equal number of external directors,if they want to come out with an IPO!!