NSE Adjusts Cash Flow Calculation for SME Platform Listings
NSE Refines Eligibility Assessment Norms for SME Listings
The National Stock Exchange (NSE) has introduced a revised methodology for calculating Free Cash Flow to Equity (FCFE) for companies seeking to list on its SME platform, NSE Emerge. This move aims to refine eligibility assessment norms and provide a more accurate representation of a company's financial health.
Under the revised framework, proceeds from the issuance of capital, including equity shares, preference shares, and securities premium, will now be included in the computation of FCFE. This marks a significant shift from the earlier definition, which excluded such inflows and relied primarily on cash flow from operations, capital expenditure, and net borrowings. The updated definition will apply with immediate effect to all draft red herring prospectuses (DRHPs) filed on NSE Emerge, as per a circular dated April 17.
The revised methodology is expected to provide some flexibility to companies that rely on equity infusions to support growth. However, market participants have expressed concerns that the change may lead to companies with weak operating cash flows getting listed due to improved FCFE optics. To mitigate this risk, the exchange has in place checks and balances to identify and deal with such companies.
Key Changes to FCFE Calculation
NSE has issued detailed clarifications on the computation of FCFE, which are outlined below:
| Computation Element | Revised Treatment |
|---|---|
| Proceeds from issuance of capital | Included in FCFE calculation |
| Short-term borrowings | Captured either in cash flow from operations or cash flow from financing, but not both |
| Fixed assets | Include both tangible and intangible assets, such as patents and copyrights |
| Financial costs | Only interest on borrowings will be considered, while charges such as bank fees, penalties, and statutory dues will be excluded |
Additionally, NSE has provided specific guidance for non-banking financial companies (NBFCs), noting that their business model requires a different treatment of borrowings and interest costs. The exchange has also clarified the treatment of hybrid instruments such as convertible preference shares and debentures, which will be classified based on their treatment in restated financial statements.
The requirement introduced in September 2024, mandating positive FCFE in at least 2 of the preceding 3 financial years for SME listings, remains unchanged. The revised methodology is expected to provide a more accurate representation of a company's financial health, and NSE has taken steps to ensure that companies are held to the same standards.
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