NSE has revised the methodology for computing Free Cash Flow to Equity (FCFE) used as an eligibility criterion for SME listings on NSE Emerge. The revised definition adds ‘Proceeds from Issuance of Capital’ (equity, preference share capital, and securities premium) as a positive component in the FCFE formula. This change applies immediately to all DRHPs filed on NSE Emerge and is accompanied by FAQs clarifying calculation methodology.

Key Points

• The FCFE positivity criterion (positive FCFE in at least 2 out of 3 preceding financial years) remains mandatory, introduced w.e.f. September 1, 2024
• Revised FCFE formula: Cash flow from Operations – Purchase of Fixed Assets + Proceeds from Issuance of Capital + Net Borrowings – Interest*(1-t)
• ‘Proceeds from Issuance of Capital’ includes equity share capital, preference share capital, any other instruments under the head Share Capital, and securities premium
• The revised definition is effective immediately for all DRHPs filed on NSE Emerge
• All other listing eligibility criteria remain unchanged
• FAQs issued clarifying that FCFE must be calculated on restated (not estimated/projected) financial statements
• Stub period financials are not considered for FCFE calculation

Regulatory Changes

Existing FCFE Definition: FCFE = Cash flow from Operations – Purchase of Fixed Assets + Net Borrowings – Interest*(1-t)

Revised FCFE Definition: FCFE = Cash flow from Operations – Purchase of Fixed Assets + Proceeds from Issuance of Capital + Net Borrowings – Interest*(1-t)

Component Definitions:

• Cash flow from Operations: Net Cash flow from Operating Activities (Cash Generated from Operating Activities minus Income Tax paid)
• Purchase of Fixed Assets: Purchase of PPE (including CWIP and Intangibles) – Sale proceeds of PPE/CWIP + Capital Advances
• Proceeds from Issuance of Capital: Equity Share Capital + Preference Share Capital + Other Share Capital instruments + Securities Premium
• Net Borrowings: (Proceeds – Repayments of LT Borrowings) + (Proceeds – Repayments of ST Borrowings)
• Interest(1-t):* Interest on borrowings × (PAT/PBT) or effective income tax rate

Compliance Requirements

• All SMEs filing DRHPs on NSE Emerge must apply the revised FCFE definition immediately
• FCFE must be computed using restated financial statements as furnished in the offer document
• Estimated or projected financials must not be used for FCFE calculations
• Stub period financials are excluded from FCFE calculations
• The positive FCFE criterion (2 out of 3 preceding financial years) continues to apply
• Merchant bankers and SME issuers should update their FCFE computation templates to incorporate capital issuance proceeds

Important Dates

• September 1, 2024: Original FCFE criterion introduced for NSE Emerge listings
• April 20, 2026: Revised FCFE definition effective immediately for all new DRHPs filed on NSE Emerge
• The revision applies until further orders from NSE

Impact Assessment

This revision broadens the FCFE definition by including capital raised through equity/preference share issuance as a positive cash flow component. This change is likely to benefit SMEs that have raised capital through rights issues, QIPs, or preferential allotments but may have marginal or negative operational free cash flows. More SMEs may now qualify for the NSE Emerge listing eligibility threshold, potentially increasing the pipeline of SME IPOs. The inclusion of securities premium is particularly significant as it can represent a substantial portion of capital raised. Companies with recent fundraising activity will see their FCFE improve under the revised methodology, lowering the bar for listing qualification.