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NOTE ON ISSUANCE OF SPECIFIED SECURITIES BY SMALL AND MEDIUM ENTERPRISES (SME) ON SME EXCHANGE

Securities and Exchange Board of India (SEBI) has amended the SEBI (ICDR) Regulations, 2009 to insert a new Chapter XA which is about the issuance of Specified Securities by Small and Medium Enterprises (SME) which will be listed on the SME Exchange. Background SEBI had, in recognition of the need for making finance available to Small & Medium Enterprises (SME), decided to encourage promotion of dedicated exchanges and/ or dedicated platforms of the exchanges for listing and trading of securities issued by SME. SEBI has defined SME exchange as follows: SME Exchange means a trading platform of a recognised stock exchange having nationwide trading terminals permitted by the Board to list the specified securities issued in accordance with this Chapter and includes stock exchange granted recognition for this purpose but does not include the Main Board. Salient features and procedures for Listing at SME Exchange are as under: A Company, whose post-issue face value capital does not exceed Rs. 10 crores shall issue its securities in accordance with provisions of this Chapter. Further, if companys post issue face value capital exceeds Rs. 10 crores but less than Rs. 25 crores, may also issue its securities in this Chapter. Eligibility criteria applicable for IPO and FPO under Chapter III of ICDR Regulations will not be applicable to companies listed on the SME exchanges. Thus conditions relating to past track record, prescribing minimum net worth, net tangible assets etc is not applicable. The requirement of filing a draft offer document with SEBI has been done away with. However, in substance, the offer document is required to contain the same disclosures applicable to a public issue. The offer document has to be filed with the SME Exchange, SEBI and the Registrar of Companies only through Merchant Banker (MB) and SEBI shall not issue any observation on the said offer document. Minimum IPO application size is Rs. 100,000/- and minimum trading lot is also Rs. 100,000/-. Minimum number of investors shall be 50 in the IPO. There shall be no continuing requirement of maintaining the minimum number of investors, subject to Companies Act, 1956 requirement. MB will be required to ensure that the issue is 100% underwritten and ensure that at least 15% of the issue size is underwritten by the MB itself.

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MB to the issue will be responsible for market making for minimum 3 years and it will be allowed to do market making along with a disclosed nominated investor like PE Funds, QIBs. The issuer shall disclose the details of arrangement in the offer document. There would not be more than 5 market makers for single scrip subject to a minimum of 2 market makers at any point of time. The MB who has the responsibility of market making may be represented on the board of the issuer. SEBI Takeovers Regulations will not be applicable to acquisition of shares through MB/ Market Maker, subject to following conditions: MB/ Market Maker does not have the intention of taking over the management; and There is no change in control (direct /indirect) of the company.

Companies listed on SME Exchange to prepare and submit financial results on a half yearly basis. The provisions relating to corporate governance specified in clause 49 of the Listing Agreement are also applicable to the listing on SME Exchange. Compulsory migration to main board, if paid-up of capital of companies listed on SME Exchange exceeds Rs. 25 crores. A Company listed on the SME Exchange, whose paid-up capital is more than Rs. 10 crores but less Rs. 25 crores, may migrate to Main Board if its shareholders approve such migration by passing a special resolution (should be passed by 2/3rd of Non-Promoters Shareholders) through postal ballot to this effect and if such company fulfils the eligibility criteria for listing laid down by the Main Board. A Company listed on the main board, whose post-issue face value capital is less than Rs. 25 crores, may migrate to SME exchange if its shareholders approve such migration by passing a special resolution through postal ballot to this effect and if such Company fulfils the eligibility criteria for listing laid down by the SME exchange. No separate registration will be required for brokers to service companies listed on SME Exchange. Similarly, no separate category of MB will be created for Market Making.

Conclusion The measures for implementation of SME Exchange are expected to give boost to SME sector for easy and simplified access to funds and provide an exit mechanism to their investors. These measures are expected to lead surge in investment activities of VC / PE who will be encouraged to invest in SME sector with surety to exit at a market driven price.

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