The jewellery industry in India is teeming with a number of small and medium enterprises with impressive legacies. Keeping these businesses in mind, the NSE created a SME stock exchange for companies who aren’t yet prepared to make their presence felt in the National Exchange, yet aspire to unlock their value and emerge on a larger stage. The panel for a session on The science of leveraging brand value on NSE’s SME platform at the Retail Jeweller India Forum 2018, dwelled on an up-close and in-depth examination of D.P. Abhushan Ltd. and the challenges Vikas Kataria, Chairman, faced to list his company on the SME exchange, thus making a transition from an unorganised to an organised business.
NSE myths busted
Myths find its roots in inadequate information. The NSE’s case is no different. “A general apprehension of getting one’s equity diluted and confidential information leaked by listing the company on the NSE is baseless,” informed Rachna Bhusari, Head-SME, National Stock Exchange. She also drew attention to the fact that a listing does not mean that the level of compliance goes up. “It is similar to what a bank would require in terms of transparency of business. But listing on the NSE enables one to create a corporate work structure and instils discipline in the business. It also mandates transparency for investors to review the growth of the organisation,” she explained.
Throwing light on the processes and advantages, Bhusari said, “The compliances are less. Even the duration for an IPO to be approved by the SEBI has been reduced to a month in the SME board as compared to six-eight months of approval time in the main board.” This also means that expenses are also more nominal in the SME.
Value creation and its benefits
“Our business, which began way back in the 1920s, has always functioned in an unorganised manner. When I joined the business, I expressed my desire to list our company on the NSE but the initial resistance came from my family primarily because they did not want to lose control over the business. I assured them that 3/4th of the equity stays with us,” explained Kataria.
Addressing a common belief that jewellers are apprehensive of a tax-based balance sheet, Bhusari hinted at the importance of maintaining the right records. According to SEBI, any company with less than Rs 25 crores of paid up capital is fit for listing in the stock exchange but NSE demands the company to show three years of track record and two years of cash profit. She said, “From an investor’s point of view, NSE expects that any company wanting to be listed on the stock exchange has already shown a certain amount of growth with returns, and are hoping for customers to buy their company shares. He agreed that SME companies often bleed a lot so depreciation is not a hurdle to listing but the balance sheets must show profit.”
Value additions can never be undermined and a change of mind set will augur well for the trade. “More than a decade back, jewellers didn’t understand the need for value creation but today, every SME stands a chance to create value in the security market,” stated Gaurav Jain, Director, Hem Securities Ltd., also the lead manager for D.P. Abhushan. He pointed out a basic difference for the uninitiated – banks require a working capital or one needs to avail a term loan which has to be repaid. In a security market, businesses can raise money without showing collaterals as it’s about value creation.” Jain suggested that a plausible process was to first become a private listed company and then invest in the security market.
Kataria has been there and done that. “A wealth creation model needs retailers to disclose their figures – especially profits – in balance sheets. The sooner they begin, the better their chances of expanding their organisational reach,” explained Kataria. He was referring to a common practise of retailers not disclosing their profits. “This had to be changed for the company to grow. This prompted us to collate all our profit figures from 2011.” They aim to have more and more customers participate in their growth and invest in their shares.
Jain however felt that it’s vital to have all sales documented to add value to the company and also avoid ambiguities while calculating profits. He stressed on why jewellers must be convinced enough to pay taxes to make profits. “If a jeweller can show Rs 10 crores profit after paying taxes, then the valuation of the company is anywhere between Rs 100 to Rs 250 crores on the NSE. Sales figures must get reflected for jewellers to understand the exact valuation of their business.”
Needless to say, a merchant banker is the catalyst to a seamless and strategic IPO experience. “It’s very important that the banker has an impeccable track record and his planning and advice are in sync with your business strategy,” felt Kataria. This apart, the time taken, of course, varies. Jain said that for a company, it may take approximately 4 months but if a partnership firm has to first convert into a company and then go for an IPO, it might take 5-6 months. For a sole proprietor, it takes longer.
An IPO comes with merits
With all the processes and figures in place, it’s a matter of time before businesses feel the difference. “Our customers now trust the company way more than they did when we were a partnership firm. With greater responsibility, we can pay more attention to our investors’ profits and returns so that it’s a win-win situation for all,” concluded Kataria.