SME Listing: An Overview of Problems and Prospects

Kochi: The 8th edition of the Destination Kerala CEO Roundtable presented by ERAM Group brought together renowned financial advisor George Korah, Managing Partner, Korah and Korah Chartered Accountants; young retail business icon Akshay Sebastian Mattathil, Partner, M.O.D. Signature Jewellery; leading strategic business consultant Sajeev Nair, CEO, Bramma Consulting and former KSIDC insider and new Director of KPMG India in Kerala, Anand Sarma, to deliberate on ‘Taking our SMEs public’. Hotel Crowne Plaza Kochi played the perfect host. The deliberations were moderated by Jose Kunnappally, Chief Editor, Destination Kerala business magazine.

JOSE KUNNAPPALLY: SME listing has become the buzzword in Kerala of late. Let us gather your initial reactions to this.

GEORGE KORAH: Right from day one an SME should focus on building a strong balance sheet. Other than balance sheet there are many other important aspects, including HR. Most of the time when entrepreneurs start off, there will not be proper HR policies or an HR person. You can’t have many changes in that initial phase of say, 36 months. If you make changes, you are going to lose time on building a good balance sheet. So HR is also an area I would like to address.

AKSHAY SEBASTIAN MATTATHIL: The biggest fear as an SME I have is about losing control. When I started my enterprise, even going to a bank for funding was the last thing on my mind, especially since I hail from a traditional family. Taking a traditional family business forward and giving it a corporate culture – right from getting your financial reporting and other statutory compliance right – is not easy.

SAJEEV NAIR: I have been practising as a strategy consultant for Nano and MSMEs and I know the pain of entrepreneurs. Most of the businesses in the MSME space are all promoter-driven. If something happens to the promoter, the business is affected severely. We have to move the organisation forward from being promoter-driven to process-driven.

ANAND SARMA: The SME listing which started in 2012 has about 200-plus companies listed, but we don’t have representation from Kerala. Most of the SMEs here are promoter-driven and they are happy paying eight-and-a-half per cent to the bank, so the business can be run the way they want it. But this trend is changing in many of the well-established SMEs as the second generation is taking over and they want to expand, scale up and diversify.

I am sure many SMEs would approach you for preparing an investment or information memorandum. What are the common mismatches that you find in terms of expectations?

GEORGE: While many startups nurture brilliant ideas, they are often blind to areas like competition, pricing, margins etc. In a normal financial projection you just grow by a fixed percentage annually in revenue. But it never happens that way actually. You may build up in quantities but the rates probably will come down and that has to be factored. The first thing we tell them, when they come to us for putting together a document, is to be conservative. It is essential to be conservative because when you bring a partner on board he or she should not lose faith in a short period of time. Another thing is pricing of the product. If you provide a conservative projection it offers a lot of comfort to a potential investor. They then look at it and say this is not something exaggerated and can be improved.

In your IPO Boot Camp you see a lot of well-placed enthusiasm or over optimism?

SAJEEV: I would say over optimism. We recommend people to have an MVP (Minimum Viable Project or Product), before going for a pitching round, but they don’t listen. I think we have covered about 78 entrepreneurs during the last two or three boot camps. Out of which, I can tell you that about 50 per cent are very realistic businesses which generateoperating profits. But they have their own problems, especially the way they have structured their business including – initial funding, shareholding pattern. So the first thing is to create a corporate hygiene. This is especially true in the Malabar belt.

I have heard companies come to KSIDC with large loan requirements but their incorporation itself would be on a low capital base so you can’t actually fund at that level. Secondly, I understand KSIDC does a lot of debt financing, but when it comes to equity is IPO considered as an exit route?

ANAND: Debt financing is always based on the debt-equity ratio. If a company’s debt-equity ratio is below a certain level KSIDC cannot fund. KSIDC does not typically focus on micro and small industries sector, but on medium and large industries. They are more aware of the criteria for funding.

With regard to your second question, KSIDC has funded quite a lot of companies and has also taken equity. For example, Geojit was funded by KSIDC in the very early stage itself. In deserving cases, depending on the criteria, along with debt KSIDC also takes up equity. That does not happen just because the promoter gives an undertaking that they would go for an IPO. There is also a share purchase agreement which is signed with the promoter whilst taking the equity. KSIDC has equity investments in several entities which are not listed.

SAJEEV: The truth is that many entrepreneurs have not thought of something called an exit plan. Once we were having an interaction with a couple of VCs and our clients. One of the entrepreneurs asked this question to the VC: “What is it that you look for when you pick a company to invest?” The VC answered: “Entry barrier; processes and systems; efficiency and competency; exit plan.” There were 60 entrepreneurs in the room, all very confused. During the break they approached me and asked: “Exit plan? Do they want to throw us out?” As entrepreneurs they have never thought of an exit. We are always looking at profits, not wealth. I think that is where the mindset has to change.

ANAND: That is one perspective. The other is the obsession with ‘how soon will the business’ get funded and at what valuation so that the promoter can take back their investment and move out. This largely happens when entrepreneurs are not too sure if their plan would succeed in the long term. There is huge herd mentality, where something succeeds and everyone goes after it without doing their home work. I have come across at least 20 e-commerce players who want to make it big but have not even seen the Amazon warehouse and do not have any idea about the scale of operations of Flipkart or Amazon. This is one of the many reasons startups fail.

Akshay, when you speak about the fear of losing control, is it a first generation challenge or is that also a second generation concern?

AKSHAY: In fact, I belong to the fifth generation. For me, it is changing. I am open. But somewhere down the line that fear is still there which never let me expand or grow. So I have to be free from that fear. As I have to move to the next level I let it go.

GEORGE: One of the things which entrepreneurs should be looking at is this: If I need to grow, I probably need not just finance but other inputs like technical and management as well. It is important to understand that it is not just the money which is coming in but so many other things. Someone is really interested in putting their money with you which means that they trust you. So there is no need for them to put the money in and throw you out, when they can actually start their own business. They have bought into you, into your beliefs, ideas and vision. What is important from the entrepreneur’s side is that you need to move from a proprietor’s mindset to trustee mindset.

What do you do when it comes to leadership and when you understand that the promoter or Founder-CEO is not the person to take it to the next level of growth?

SAJEEV: Primarily there are three key roles in an organisation. One is a visionary role, second is a strategic role and third is an execution role. So any organisation in which these three roles are being performed in a good way with right kind of people – a person at the head who is a visionary supported by a strategist and then, in turn, by an executor – succeeds. Every entrepreneur is not a visionary. Some of the entrepreneurs are good strategists, not visionaries. The strategists always ask this question ‘how?’ The visionaries ask ‘why?’ while the executioners always ask ‘what?’ Some entrepreneurs are very good in execution and they may require a visionary’s support. So we have to create a structure in such a way that, for example if you are a visionary you need to have a strategist. We always advise entrepreneurs to understand where they stand and what kind of process they have to build. Based on the process or system you choose right kind of people. So HR is important in that sense, no doubt.

Can you add the HR perspective to this?

GEORGE: It is a very tough situation if either you are the only person who is leading the organisation or you have 80-90 per cent of shareholding and call the shots. In such a situation you really have to be careful while scaling up. I think it would be worth it if you could bring in leadership not just as employees or managers but as co-owners also before you step down. Then only will they be interested in running the organisation together with you. If you bring in leaders basically as employees they don’t have any real skin in the game.

If we look back why is it that while we have so many successful SMEs, hardly any have either opted for IPO or got listed. What do you think are the main reasons for this?

ANAND: A lot of these SMEs are first generation self-made entrepreneurs. So they have fears about relinquishing power. They feel that today they are the absolute owners and tomorrow, if they borrow money from someone, those investors may start dictating terms.

Second thing is that a lot of first generation entrepreneurs say that they are content with whatever they have and don’t really need outside funding. When it comes to SME listing, the maximum number of companies is from Gujarat, which is a reflection of their evolved business mindset.

It is very surprising that some of these family-run SME businesses in Kerala which are today listed have returned value beyond anybody’s imagination but it has not generated interest in other SMEs!

SAJEEV: When we interact with entrepreneurs here, there is always a feeling in their mind; ‘I have worked so hard and built it up to such a level. I own a Mercedes Benz and a bungalow. Why should I grow further?’ Let the children come and do something. Yes, that is a major issue in this State. When you have everything, it needs real aspiration, which also has a lot of sacrifice built into it to move ahead. I think anybody who has gone for IPO from the State must have reached a level at which they are thinking that they wanted to create wealth but at the same time distribute it also. That kind of aspiration is there with very limited number of people because it requires some more hard work and sacrifice from their side.

We are educated but we don’t know much about wealth. Not much real-time effort has been made for creating wealth. Even businesses are running on market mechanism today. Nobody is even thinking about capital. In the entrepreneurial ecosystem of Kerala, there is no awareness about companies being listed. When we announced IPO Boot Camp, not many entrepreneurs understood even the meaning of it. So lack of education is a crucial issue.

How critical is financial and compliance education for SME business leaders?

GEORGE: The very first step is to get some understanding about accounting, so that you can ask right questions. When you want some information and you ask the accounts person, he replies in a language which is very foreign to you. Many times what happens is that I try to teach some of our entrepreneur clients how to look at what we call the trial balance. If you can look at the trial balance and understand that you can ask the right questions. It is only from a trial balance that a balance sheet will come in. The second part is financial compliance. One issue that we find is the absence of focus on statutory compliance. Either you are late in filing or you are a last-day filer. A last-day filer means actually what you have filed may not be correct. If we take products and services which you are actually handling, you have statutory compliance, whether they are environment-related or food-related ones. That is one part of it. The second part is both direct tax and income tax. Most of the organisations are private limited companies and therefore, Companies Act comes in. Companies Act today has become very stringent that you get to read how so many directors were disqualified because of their failure to file their company’s returns on time. And the other thing with regard to building a strong balance sheet, I would say, is some sound financial policies which, if you keep in mind right from the beginning, will help you. And the situation is such that when you look at their P&L (Profit and Loss Account), the interest to financial institutions, is probably more than the salary paid. What is happening is that you have actually overgeared yourself for facing this kind of situation. So you have to be careful about taking debt, like working capital debt which is short term. The other thing is of course cash management. We find this as the number one issue as most of the SMEs often run out of cash very fast. Moreover, too much of cash is out in the market, in terms of credit even now.

SAJEEV: We always find that to a certain level any company’s growth or failure depends more on financial management than marketing management. Most of the time entrepreneurs think like what Anand said, “financial management is my chartered accountant’s job, not mine.” This is a common statement, we always tell the entrepreneurs that the chartered accountant is your architect. It is just like building a house; you go to an architect with specifics, discussing what all you need. Likewise, will you share your vision with a chartered accountant? Most people will not. Once in a while you need to sit with the chartered accountant and tell him that this is where I want to reach; five years down the line I want my company to go public, so that I am ready to go through all the pains. That kind of a conversation is not happening.

GEORGE: What we find generally is that your organisation will have a chartered accountant as a statutory auditor, but when will you interact with that person? Maybe only at the end of the year, that, too, with complaints. The aspect of building business doesn’t come into play at all. Chartered accountant is the one who helps take the business to the next level in terms of financial processes. The entrepreneur should interact with him properly and the best time for that would be the months of December, January and February. That is the time when the chartered accountant will be free.

What has been the VC sentiment?

SAJEEV: Interestingly, now we get to see optimistic views from all structured investors like VCs about Kerala. I am talking about the past few years, because most of them have not had the exposure to do business out here. One of the good qualities that the investors appreciate about the entrepreneurs here is that they are sincere. We are trustworthy and committed to the core and, if we take up something, we do it. But maybe the ignorance about financial and capital-related matters often leads the entrepreneur to think whether he would lose control over business which may, in turn, prove to be an inhibiting factor. But now things have changed, the generation of Akshay has started thinking like, “I need to bring in structured funding into my organisation”. The good thing is that when you have VC, the person who will be sitting on your board will be an expert of that particular industry. We are seeing some very good symptoms and optimistic moves out here in the State.

When you look at SME aspiration or readiness to list do you see any regional variations, for e.g. Malabar region may have a different approach because they have easy access to informal capital?

SAJEEV: There are two things. One is that in Kerala, if you look at the business ecosystem, it is largly moving to Malabar region. Many members of the Muslim community there, which is dominating the business circle, had problems in taking loans from bank and they were not much aware of the structure of funding. Now, after they have realised its potential, they have become bullish about it. In terms of investment base, a major wave is moving towards north Kerala.

ANAND: Here the trend I see is that more than listing, people are looking for easy funding which lot of them feel will give them several advantages compared to a particular listing where the regulatory requirements and so many other things are more compared to a typical VC or PEs funding. Lot of youngsters are also aware that VCs and PE focusing on specific sectors are good. And this is also a trend in the deals happening; one of the biggest deals being Warburg Pincus investing $200 million in Kalyan Jewellers, and again Blackstone investing in IBS. What happens is that they have their persons on both boards and have the support of sector-based experts.

SAJEEV: As one of the angel investors said, most of the time the major challenge is that when a promoter comes in for funds, it is his dream and my money, and after I have invested, it is his money and my dream – it is all about commitment. Though the entrepreneurs are not interested to get listed they go after Angel Investors, VCs or PEs. They should have a plan for IPO to attract these VCs or PEs, because that is the roadmap.

When do you think that an SME should look at going public? What is the time frame that is generally realistic.

GEORGE: I think when they start their enterprise, at the end of the first year, they should have a plan, which may be very basic, in place for something like an IPO. It should be there in their minds, then only they can set their system right. I will say that as early as possible you must have this in view that you will go public one day. So let’s start working towards putting better processes in place which will help you. You should be looking at a five-year plan. In that, the first two years may be a kind of a break even and then beyond that it should be profitable. The thought process should start as early as possible.

SAJEEV: The moment you take a decision you think of a five-year plan. Create a roadmap. That is most important. It may not be an excellent plan. Start setting up your processes in place. When you start doing it you will see the flow around the organisation. At some point of time you see everything falling in place. It is the time for you to take it to the next level.


You need to plan for financial discipline and leadership bandwidth as well as business scalability from day one of your enterprise going live. This is a long, often arduous but nevertheless exciting journey that helps you go beyond making profits to creating wealth not only for yourself but also for the society at large. It is heartening to know that more and more SMEs are looking at the IPO roadmap, going beyond traditional success, conquering international markets and building sustainable organisations.