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SEBI decides on norms for SME listings - International Law Office

International Law Office

Capital Markets - India

SEBI decides on norms for SME listings

January 19 2010

On December 9 2009 the Securities and Exchange Board of India (SEBI) decided its listing requirements for small and medium-sized enterprises (SMEs). The following decisions were taken in this regard:

  • Companies listed on the SME exchange will be exempted from the eligibility norms applicable to initial public offerings (IPOs) and follow-on public offerings prescribed in the SEBI (Issue of Capital and Disclosure Requirements) Regulations 2009.
  • In order to have informed, financially sound and well-researched investors with a certain risk-taking ability, a minimum IPO application size of Rs100,000 will be prescribed.
  • The minimum trading lot will be Rs100,000.
  • An upper limit of Rs250-million paid-up capital will be prescribed in order for a company to be listed on the SME platform or exchange and a minimum paid-up capital of Rs100 million will be prescribed for listing on the main boards of the National Stock Exchange of India and the Bombay Stock Exchange.
  • Offer documents must be filed with SEBI and the exchange. SEBI will issue no observations on offer documents filed by merchant bankers.
  • The merchant banker to the issue will be responsible for market making for a minimum period of three years. Merchant bankers will be allowed to carry out market making alongside a disclosed nominated investor (eg, a private equity investor, a venture capitalist, a high-net-worth individual or a qualified institutional buyer). Under this arrangement, all stock being bought and sold as part of market making will ultimately be transferred to the disclosed nominated investor with which the merchant banker has a contractual agreement. The merchant banker must disclose its intention of this arrangement and have it approved by the stock exchanges on which the issuer SME is listed.
  • Certain well-capitalized registered entities such as venture capitalists may be allowed to have a contractual agreement with the merchant banker to share the burden of transferring underwriting obligations.
  • During the compulsory market-making period, promoters and acquirers will be allowed to dilute their shareholding only through an offer for sale or an offer to an acquirer, not a market maker.
  • The SEBI Regulations on Takeover (Substantial Acquisition of Shares and Takeovers Regulations) will not apply to acquisitions of shares through a merchant banker or market maker, provided that the merchant banker or market maker does not intend to take over management and there is no change in the direct or indirect control of the company.
  • Merchant bankers with a responsibility for market making and a firm allotment in the IPO for the purpose of market making may choose to be represented on the company's board of directors, subject to the issuer's agreement. However, this will not be mandatory.
  • No separate category of merchant bankers will be created.
  • Merchant bankers will be required to ensure that the issue is 100% underwritten. However, only a minimum percentage (15%) of the issue size must be underwritten by the merchant banker itself.
  • A minimum number of investors (eg, 50) will be specified for the IPO only. There will be no continuing requirement to maintain the minimum number of investors. However, compliance with the requirements of the Companies Act 1956 must be ensured at all times.
  • No separate registration will be required for brokers intending to service companies listed on the SME exchange or platform.
  • Companies listed on the SME exchange or platform must migrate to an equity exchange or segment (main board) on exceeding the Rs250 million post-issue paid-up capital limit. Further, if a follow-on offer or rights issue results in triggering the above limit (of Rs250 million), the company must migrate to the main board.
  • Companies listed on the SME exchange or platform of an existing exchange may send their shareholders a statement containing the salient features of all the documents as prescribed in Section 219(1)(b)(iv) of the Companies Act. This information will be displayed on the exchange website and the company must also maintain a website on which it can be displayed.
  • Investors with holdings of value of less than Rs100,000 (such a reduction in the holding may be due to falling prices or the investor having previously offloaded part of the holding) may offload their holding to the market maker in that scrip (provided that the investor sells its entire holding in that scrip in one lot). Market makers will be authorized to buy these shares from such investors.
  • SMEs must prepare and submit financial results (as mandated in the listing agreement) on a half-yearly basis instead of a quarterly basis.
  • SMEs must comply with all provisions of Clause 49 (corporate governance).

SEBI has been working to establish an SME exchange or a separate platform for SMEs on the stock exchanges. It is hoped that these new changes will strengthen the position of SMEs within the capital market.

For further information on this topic please contact Manoj K Singh at Singh & Associates by telephone (+91 11 4666 5000), fax (+91 11 4666 5001) or email (manoj@singhassociates.in).

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