The NSE SME platform provides technology startups in India with an avenue for listing, allowing them to access a broader spectrum of investors and funding sources while increasing their market visibility. This article explores the problems technology startups face, how the NSE SME platform offers a solution, technical aspects, and its pros and cons.
Problems Faced by Technology Startups
Technology startups in India often face numerous challenges in accessing capital. Despite a thriving startup ecosystem, many companies struggle to secure the necessary funding, primarily due to:
- Limited Access to Institutional Funding: Traditional banks and financial institutions often view tech startups as high-risk, making it difficult for these businesses to secure loans.
- Need for Credibility and Visibility: Without a platform to showcase their growth potential and credibility, startups often face challenges in proving their viability to investors.
- Growth Constraints: Limited funding directly affects a startup’s ability to expand, invest in technology, and scale operations effectively.
NSE SME Platform for Technology Startups: A Solution
The NSE SME platform offers an effective solution by allowing technology startups to list their shares, attract institutional investors, and gain market credibility. With a dedicated focus on smaller companies, the platform serves as a stepping stone for startups seeking exposure and capital without going through the full initial public offering (IPO) process. The SME platform provides:
- Increased Visibility: Listing enables startups to increase their market presence and gain recognition.
- Access to Capital: By listing, technology startups can attract investments from both qualified institutional buyers and private equity firms, helping to fuel their growth.
- Improved Credibility: A public listing on the NSE SME platform enhances a startup’s credibility among investors and stakeholders, enabling further opportunities for business expansion.
Technical Criteria and Requirements
Technology startups looking to list on the NSE SME platform must meet specific eligibility criteria and conditions that ensure only qualified businesses gain access. These technical aspects are set by the NSE to maintain the platform’s credibility and integrity. Here are the key requirements:
- Incorporation
The startup must be registered as a company under either the Companies Act 1956 or the Companies Act 2013 in India. This establishes a legal framework for the company’s operations and enables it to interact within the corporate governance landscape. - Post-Issue Paid-Up Capital
Post-listing, the startup’s paid-up capital must not exceed INR 25 crore. This condition ensures that only small and medium enterprises are eligible, maintaining the SME platform’s focus on emerging companies.
- Track Record
A company or its promoters must have a minimum three-year track record, either:- As an applicant for listing,
- As promoters with at least 20% post-issue equity share capital, or
- As a converted partnership or proprietary firm with relevant business experience
Additionally, the startup must demonstrate a revenue threshold of INR 10 crore and show at least 20% annual growth over the past year, which can be indicated through metrics such as user growth or revenue increase. The company’s net worth must also be positive.
- Shareholding Conditions
- To ensure institutional support, the startup must meet one of the following criteria:
- At least 10% of pre-issue capital held by a qualified institutional buyer (QIB), or
- 10% held by angel investor networks or private equity firms with a history of investing in a minimum of 25 startups with a cumulative investment of INR 50 crore or more
- Other Listing Conditions
To maintain quality, companies listed on the SME platform should:- Not have been referred to the Board for Industrial and Financial Reconstruction (BIFR),
- Have no active winding-up petition,
- Be free from significant regulatory or disciplinary actions in the past three years.
- Disclosures
Transparency is crucial for listed companies, and startups must disclose essential information, including:- Past regulatory or disciplinary actions,
- Defaults in loan or debt payments in the past three years, verified by an auditor,
- Details of any criminal charges against directors or the promoter group.
Pros of Listing for Technology Startups on the NSE SME Platform
- Capital Access for Expansion
Listing on the SME platform helps technology startups attract capital from institutional investors, angel networks, and private equity firms. This access to funding is vital for growth, particularly in high-potential but capital-intensive sectors like technology, data analytics, and biotechnology.
Example: An AI-based healthcare startup listed on the NSE SME platform can attract investment from healthcare-focused VCs, enabling it to scale operations, invest in R&D, and explore new markets.
- Enhanced Market Visibility and Credibility
A listing on the NSE SME platform provides startups with a seal of credibility, attracting attention from potential clients, partners, and talent. This improved perception aids in establishing partnerships and even attracting future funding rounds.
Example: A fintech company that lists on the NSE SME platform may find it easier to build trust with banks and other financial institutions, easing future fundraising efforts.
- Investor Diversification and Portfolio Rotation
The platform allows angel investors and venture capitalists to exit their positions, creating room for new investors to come in. This diversification helps startups to attract long-term investors who can support the next phase of their growth.
Example: A tech startup in the edtech space that has matured could see initial investors exiting to make way for larger VCs, which could help the startup navigate its growth from a mid-size to a large enterprise.
- Potential to Upgrade to Main Board
Technology startups listed on the NSE SME platform can eventually transition to the NSE main board once they meet the main board listing criteria. This transition facilitates access to a larger pool of capital and enhances their brand visibility.
Cons of Listing for Technology Startups on the NSE SME Platform
- Compliance and Regulatory Costs
Listing requires adherence to stringent regulatory and compliance standards, which can be challenging and costly for small startups. The ongoing costs of reporting, audits, and disclosures may place a financial strain on smaller firms.
Example: A blockchain startup listing on the SME platform must budget for regular compliance costs, which may impact its operational funds if not planned carefully.
- Increased Public Scrutiny
Once listed, a startup’s financial and operational information becomes public, which may lead to increased scrutiny from both investors and competitors. Startups operating in highly competitive markets may find this transparency challenging.
Example: A cybersecurity startup could face competitive pressure if its growth rate and financial data are publicly available, revealing strategic shifts to its competitors.
- Liquidity Challenges for Investors
Due to smaller trade volumes on the SME platform, some investors may find it challenging to exit their investments efficiently. The liquidity issue might impact a startup’s ability to attract certain investor profiles who prioritize ease of exit.
- Risk of Market Volatility
Technology startups, especially those in emerging sectors, may experience fluctuating valuations due to changing market sentiments. A downturn in market perception may adversely affect a listed startup’s valuation, impacting its overall growth.
Conclusion
The NSE SME platform serves as a powerful gateway for technology startups in India, providing a structured and efficient way to access capital, improve credibility, and fuel growth. While there are compliance costs and the risk of public scrutiny, the platform’s advantages in facilitating funding, portfolio churn for investors, and potential main board upgrades make it an attractive option. As India’s tech ecosystem continues to flourish, the NSE SME platform offers a unique bridge, connecting emerging companies with much-needed financial and market opportunities.
“For a detailed guide on how SME IPOs in India are helping small businesses grow, check out our blog, “Understanding SME IPOs: A Gateway for Small and Medium Enterprises” and “SME IPOs in India: A Path to Growth for Small Businesses”