Are NSE guidelines a case of over-regulation for SMEs-

Are NSE guidelines a case of over-regulation for SMEs?

By Manish Chowdhury

In the recent past, there has been a flurry of Small and Medium-sized Enterprises (SME) listing compared to the main board listing on the National Stock Exchange (NSE). To put things in perspective, the number of SMEs taking the IPO path stood at 109 in 2022, compared to 59 in 2021, a whopping rise of more than 80%. What makes this number more interesting is that during the same period, the main board issuances remained subdued (40 in 2022 versus 63 in 2021). With a desire for listing, many small-sized companies initially start with an SME listing due to regulatory hurdles and eventually move to the main board when their business grows and reaches an acceptable size. Multiple benefits have prompted SME-listed companies to migrate to the main board including:

However, amid a flurry of SME listing and a growing desire of these companies to move to the main board, the NSE has revised the eligibility criteria for SMEs looking to make the switch. We believe that the change in regulations related to the migration to the main board is more to do with the perceived risk these companies carry, especially in a rising interest rate environment. In the circular dated 20 April 2023, the NSE revised the criteria stated earlier on 21 January 2021. Moreover, it has introduced some new provisions as well. Some major highlights of the revised guidelines are as follows:

The new guideline requires SMEs to list on the SME platform for at least three years. Earlier, the guideline required a listing on the SME platform for at least two years.The applicant company should also have positive cash accruals (EBITDA) from operations for each of the three financial years preceding the migration application. Earlier, it was positive cash accruals for at least any two financial years out of three financial years preceding the application.The company should have a minimum net worth of Rs. 50 crores versus the earlier requirement of positive net worth.In addition, the company should have positive PAT (profit after tax) in the immediate financial year of making the migration application to the exchange. Earlier, this condition was not there.Moreover, the SME should have at least 1,000 public shareholders on the last day of the preceding quarter from the date of application before moving to the main board. Earlier, this condition was also not there.

With a large number of SMEs transitioning fast / willing to move to the main board, a tightening of the screw by exchanges is necessary to protect investor interest without repressing the fair spirit of SME companies that deliver on performance. We view this change in guidelines by the NSE as a foresight on their part and a step in the direction of ensuring that the interest of the larger investment community is protected. We expect the exchanges to be vigilant going forward, as we believe that a tough economic operating environment might weigh on the performance of smaller-sized companies. We feel that the NSE is taking a proactive approach and ensuring that some unforeseen circumstances do not take place in the future. However, care should be taken that any over-regulation might jeopardize the strength of the SME sector and also cast doubts over the fair play environment that is necessary to be provided by the exchanges.

(Manish Chowdhury, Head of Research Stoxbox. Views expressed are author’s own.)