Emerge listing for an auto-parts maker whose balance sheet is one notch too levered
Sanchit Precision Components Ltd, a Pune auto-parts maker with FY25 revenue of ₹46 crore, wants to list on NSE Emerge. Its latest audited accounts show net worth of ₹8.4 crore, net tangible assets of ₹6.1 crore, total debt of ₹27.5 crore, and EBITDA of ₹3.1 crore (FY25), ₹1.9 crore (FY24) and a negative ₹0.6 crore (FY23). The company has a three-year track record and its banker certifies no default to any bank or financial institution. The lead manager proposes a fresh issue of 38 lakh shares at ₹50, raising ₹19 crore, after which paid-up capital will be ₹11 crore and the promoters will hold 65.5%. The promoters also hold ₹5 crore of interest-bearing unsecured loans in the company and would rather leave them there until after listing. They ask the lead manager three questions: can the company file now, will the shares find buyers after listing, and why the exchange insists on underwriting and market making.
1. Test Sanchit against each NSE Emerge eligibility condition using the numbers given. Which single condition blocks the filing, and does converting the ₹5 crore of promoter loans into equity before filing cure it?
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Condition-by-condition test
- Net worth ₹8.4 crore vs minimum ₹1 crore: passes.
- Net tangible assets ₹6.1 crore vs minimum ₹1.5 crore: passes.
- Track record of three years with positive EBITDA in at least two of the last three years: FY25 +3.1, FY24 +1.9, FY23 -0.6, so two of three positive: passes.
- No default to banks or financial institutions, certified by the banker: passes.
- Promoter holding after the issue 65.5% vs minimum 20% post-issue: passes.
- Post-issue paid-up capital ₹11 crore vs ceiling of ₹25 crore: passes.
- Leverage: total debt divided by net worth = 27.5 / 8.4 = 3.27 : 1, against a ceiling of 3 : 1. Fails.
Does the conversion cure it? Yes. Converting ₹5 crore of loans into equity moves ₹5 crore from debt to net worth: debt becomes ₹22.5 crore, net worth becomes ₹13.4 crore, and leverage becomes 22.5 / 13.4 = 1.68 : 1, comfortably inside the cap. The company should complete the conversion, get it reflected in audited accounts and disclose it in the offer document before filing. Note that the conversion adds shares, so promoter holding changes and the conversion price must be a defensible fair value.
2. The lead manager says the issue will be fully underwritten and that market making will run for three years. Explain why these obligations exist on Emerge, who bears the cost, and what this means for the ₹19 crore figure the promoters are counting on.
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Why the obligations exist. SME issuers are small, thinly traded and barely researched. The SME platform framework therefore requires the entire issue to be underwritten, and the exchange requires mandatory market making for three years from listing.
- 100% underwriting: an underwriter commits to the whole ₹19 crore, so any unsold portion lands on its books. This is why the lead manager will not carry it alone and will build a syndicate of underwriters.
- Market making: a market maker must give two-way quotes within a maximum spread and a minimum depth for three years, so a retail investor has some exit even when no natural buyer appears. It is the direct answer to the promoters' worry about buyers after listing, though it guarantees a quote, not a price.
Who pays. The company, out of the proceeds. Underwriting fees and market-making fees (typically a few per cent of the issue) plus other issue expenses are deducted, so the net amount available for the new plant is materially less than ₹19 crore.
Judgement. The cost is the price of access for a company of this size; without it the issue would attract little institutional interest. Plan the project on the net figure, not the gross.
3. The promoters prefer to use ₹5 crore of the fresh issue to repay debt after listing rather than converting their loans before filing. Would that solve the eligibility problem? State one cost of the conversion route.
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No. Eligibility is assessed on the latest audited pre-issue financial statements at the time of filing. The exchange and the lead manager look at the balance sheet as it stands, not at how the proceeds will be used after listing. A post-issue repayment is a use of proceeds, disclosed in the objects of the issue; it does not change the 3.27 : 1 leverage on which the filing is judged. Filing on the current accounts would fail the leverage test.
The sequence therefore matters: cure the ratio first, file afterwards. Repaying the loan from IPO money is also slower (money arrives after allotment), while conversion takes effect the moment it is booked and audited.
One cost of conversion. The promoter loans are interest-bearing, and that interest is a deductible expense for the company. Converting them into equity removes the interest shield and adds shares, which dilutes earnings per share and enlarges the post-issue share count. The promoters must be satisfied that the tax and dilution cost is smaller than the cost of delaying the listing by a year.