Bankers want lowering of dilution norms for SME firms

Change in dilution norms will help encourage more companies to come on board SME platform

Merchant bankers want market regulator Securities and Exchange Board of India (Sebi) to lower the minimum dilution requirements for SME firms at the time of listing from the current 25% of equity to 10%.

According to experts, the change in dilution norms will help encourage more companies to come on board the SME platform. At present, BSE has 119 firms listed on its SME platform as of date, while NSE has listed more than 30 firms.

They believe that at present the funding needs of these firms may be much lesser than the fair value of stake to be diluted. "There is a valuation mismatch between the need for funding and the valuation of the company. For instance, the company may require just Rs 5-10 crore but the amount to be raised after 25% dilution could amount to Rs 30-40 crore," said Mahavir Lunawat, managing director of Pantomath Capital Advisors, a merchant banking firm that handles SME issues.

Most of these firms already have investors in the form of angel or venture capital funding. So the promoters would have already diluted their stake to the extent of 10-15% even before the IPO. After the IPO, the total dilution could be as high as 40%, which is on the higher side, said experts. "These companies are in their initial stage of business lifecycle and may require more capital for future growth but this may become a challenge since the promoters might not be too keen on diluting their stake further," said Lunawat.

The SME segment is still grappling with issues such as lack of liquidity and lacklustre institutional participation. Both NSE and BSE had launched separate SME platforms in March 2012 after the regulator came out with easier listing and disclosure guidelines to help small firms tap the capital market.

Bankers believe that the overall framework of minimum 25% public float need not be diluted and before any SME migrates to the main board of the exchanges, the company could be required to maintain minimum public float of 25%. "Sebi should allow for a lower minimum dilution while listing but maintain a 25% public float while migrating to the main board," added Lunawat.

Besides lower the dilution requirement, experts say the need of the hour is to bring in priority investing from big institutional players and tweak the lot size to improve liquidity. The minimum lot size varies between Rs 1 lakh and Rs 2 lakh.

"The segment needs a complete overhaul as there are hardly any qualified investors willing to put money into these companies," said G Ganesh, founder, Inga Capital. "The stocks are traded among a select group, mostly promoters. You can't get in and out at will."