Stock market a good place to raise capital

SMEs usually start with small capital and have unique types of products to offer. As their market share is small, they can not produce much. Generally they do not generate good profit in the beginning. So the start-up SMEs remain less profitable. As a result, banks are unwilling to finance these enterprises.
Surprisingly, both local and international private commercial banks lack skilled manpower to assess risk factor of SME businesses. Monitoring and management cost for such loans are also high. As a result, bank charges high interest rate which is not viable for any SME business. Thus SMEs are in a vicious circle of low finance-low business-low profit loop.
CAPITAL MARKET AS A FUNDING SOURCE: In Bangladesh, many non-governmental organisations (NGOs) are running their operation. But the size of loan they provide is not adequate. Loan repayment terms and conditions and interest rates are not friendly to the small and medium enterprises.
Capital market is a good place to raise capital. But raising money from stock market is not easy. Recent financial crisis has made the entrance of new firms in capital market lengthier. As SMEs are unsafe and small ventures, they face more trouble in getting listed.
Two stock exchanges are operating in Bangladesh - Dhaka Stock Exchange (DSE) and Chittagong Stock Exchange (CSE). Established in 1954, DSE has 547 listed companies and market capitalisation is BDT 3.2 trillion as of December 2014. CSE was established in 1995 and has 257 listed companies with market capitalisation of BDT 2.6 trillion as of December 2014. These markets are supervised by the Bangladesh Securities and Exchange Commission.  SMEs are automatically excluded from applying to the capital markets as the minimum paid-up capital requirements is Tk.100 million in DSE and Tk.10 million in CSE.
In Bangladesh, no SME exchange is in place to raise funds from the capital market. In India, in response to the recommendations of the Prime Minister's Task Force, two dedicated SME exchanges were launched in 2012. The Philippines launched the SME Board under the Philippines Stock Exchange in 2001. While in Malaysia and Thailand there are no dedicated SME exchanges, but there are markets that SMEs can tap. In Vietnam, the Hanoi Stock Exchange has a trading venue for unlisted public companies, named UPCoM, which was established in 2009. There are no listing fees for UPCoM. Indonesia has no SME capital market, but preferential treatment is given to SMEs to tap Indonesia Stock Exchange market.
There is no specialised SME capital market in our country. The existing over-the-counter (OTC) market is recognised as an SME exchange under the Dhaka Stock Exchange.
EEF AND VENTURE CAPITAL FOR SME: To develop and set up new companies/subsidiaries in IT and agro sectors, Equity and Entrepreneurship Fund (EEF) was established with an amount of Tk.1,000 million in the 2000-2001 budget. After launching it, the Bangladesh Bank took the main responsibility to initiate this project. On April 16, 2009, the Bangladesh Bank gave the responsibility of EEF to ICB as a sub-agent after having permission from the Ministry of Finance. According to EEF related rules, implementation and monitoring are done by EEF unit of the Bangladesh Bank. The amount granted by EEF for different projects is Tk.27,000 million and the released amount from Ministry is Tk.12,250 million as of information received up to 2013.
So far the number of EEF projects in agro sector is much higher than that of ICT, as the latter needs longer time to start operation. In the agro sector also, all types of products are not allowed to get EEF benefits. Some promising sectors like potato chips and cold storages are excluded from EEF funding because of their unreliable nature.
In the BUILD's study on EEF and ICT financing, it is seen that EEF has got several loopholes and is not availed of by many. The companies have to be registered as private limited companies according to the Companies Act 1994 and have to issue share certificates equivalent to EEF amount in the name of the government of Bangladesh. ICT entrepreneurs cannot stay in the capital market because the threshold to qualify for IPO is high. So, before granting the EEF amount, the BB takes an undertaking from the company that they have to buy back the shares from their personal account. But in the EEF (ICT) Fund Consumption Policy of 2009, there was the system to issue share certificates based on installments.  
The amount of EEF support for individual ICT concern is maximum Tk.50 million, of which 51 per cent is the equity of the entrepreneur. But disbursement of the installments takes one and half year. Before that, the evaluation of ICB and lien bank or financial institution also takes a long time. IT entrepreneurs need sufficient breathing time to start buy-back. In addition, the net profit margin after covering all the overhead expenses may not be sufficient to allow the buy-back if these time constraints remain the same.
As per EEF policy, after completion of 8 years timeline of EEF support, the share amount will be converted to loan. And the interest rate is determined by the BB. But the entrepreneurs want to know the interest rate before they take the first installment. There should be a mechanism to determine the interest rate, which will be the same for all and entrepreneurs should be informed about it before they start taking the EEF support.
In order to make the entrepreneurs (especially ICT firms) more compliant and accountable to run their companies as per EEF policy, exchange of information among all concerned companies, the BB, lien bank and ICB is necessary. According to revised EEF Policy, they should call a meeting every three months and the nominated Director will give a report based on this. But this provision is not followed by many entrepreneurs.  
REFINANCING SCHEME FOR SME: The Bangladesh Bank has opened a new SME and Special Programme Department (SMESPD) on December 31, 2009 so that financing to SMEs can be strengthened. The main objective of the department is to create an enabling environment for the SMEs with priority to cottage, micro and small entrepreneurs and labour-intensive, value added and employment generating sectors, support for women entrepreneurs, use of modern technology for SME banking and supporting SME financing by establishing an information storage.  
Refinancing is one of the important supports extended by banks for financing SMEs. Refinancing Scheme for small enterprise sector allowed as per circular of the Bangladesh Bank in 2004, was extended to 2007 allowing women entrepreneurs to get loans at bank rate plus five per cent. These type of financing is enterprise-driven, objective of which is to support entrepreneurs so that the BB can suggest a fixed rate to the disbursing banks. Besides, there is funding from JICA and ADB to support SMEs, interest rate of which has been determined at the market rate. These financing are mostly bank-driven as they can fix the interest rates based on demand and supply of the markets.
In 2010, another circular from the Bangladesh Bank was issued for refinancing the agro-sector, especially those which are established in rural areas. A new refinancing scheme was floated in 2014 for supporting new entrepreneurs. The latest refinancing circular was issued under the name of Islamic refinancing scheme in October 2014 for funding the SMEs.
Beyond these refinancing schemes, banks are free to set their interest rates within the bands circulated from time to time by the Bangladesh bank, the highest band remaining within 15.0-16.0 per cent.
There are different opinions among entrepreneurs regarding financing from banks where there is a usual claim that SMEs are the worst sufferers in respect of funding from the banks. It is always argued that banks charge higher interest rate to cover the risk of collateral-free investments.
MEZZANINE FINANCING: Mezzanine financing is a different form of financing driven by demand for growth capital from companies that want to avoid equity dilution. Mezzanine financing is basically debt capital that gives the lender the right to claim ownership or equity interest in the company if the loan is not paid back in time and in full. It is generally subordinated to debt provided by senior lenders such as banks and venture capital companies. Since mezzanine financing is usually provided to the borrower very quickly with little diligence on the part of the lender and little or no collateral security by the borrower, this type of financing is aggressively priced with the lender seeking a return in the 20-30.0 per cent range. Growth of private equity (PE) increased from 2.6 per cent in 2006 to 10.6 per cent in 2012 in Southeast Asia. Some funds are already provided as mezzanine financing, albeit on a limited scale. Since SMEs are mostly handicapped by insufficient capital, Mezzanine Financing could be an alternative source of finance. But as they have also not enough experience in negotiating complex deals, banks and parent companies should come forward for risk management issues to support SMEs.
The last part of the article will be published on Saturday, February 21, 2015.
The writer is CEO of Business Initiative Leading Development (BUILD), Dhaka, Bangladesh.
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