The Securities and Exchange Board of India (Sebi) on Wednesday issued the legal framework for setting up a separate platform/stock exchange for small and medium enterprises (SMEs). The market regulator has set a minimum networth of Rs 100 crore for entities wanting to set up SME exchanges.
Sebi has said that such exchanges should be corporatised since inception and demutualised within one-to-two years from the start of trading. This means that the promoter of the exchange has to dilute 51 per cent equity within the specified period.
Other norms prescribed by the regulator include having trading terminals across the country, an online screen-based trading system and suitable business continuity plan with a disaster recovery site.
These conditions make it virtually impossible for regional exchanges to set up SME exchanges independently. Demutualised regional exchanges such as the Delhi Stock Exchange (DSE) don’t have nationwide terminals or reach. Financial Technologies has picked up 5 per cent stake in DSE, while the Bombay Stock Exchange (BSE) holds as much equity in the Calcutta Stock Exchange (CSE). Both the exchanges have declared their intentions to convert themselves into SME bourses. DSE and CSE can set up such platforms with license to use the network of their partners only.
Financial Technologies-promoted Multi-Commodity Exchange (MCX) and its subsidiary for currency futures have nationwide network.
The market regulator has also said that such entities have to have online surveillance system in place. Financial Technologies, BSE and NSE have expressed their willingness to set up SME exchanges. Since they have ready infrastructure and other capabilities as required by the regulator, they may move faster than others.
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The exchange for SMEs will be different from the existing stock exchanges in terms of companies raising capital and investors investing money in such companies. Sebi has fixed a minimum trading lot of Rs 1 lakh and said that the trading system may either be order-driven, or quote-driven. The settlement may either be on rolling, trade for trade, or on call auction basis. The clearing function of the exchange may be performed by a clearing corporation/clearing house, the regulator said in the legal framework.
A separate exchange for SMEs was advocated since long and the in its last board meeting, Sebi had cleared the proposal to allow such exchanges. SME exchanges have to be registered under the SCR Act, the regulator has said, adding that even their members should be registered with Sebi. The exchange will help small and medium companies raise capital, especially when such companies don’t have required track record.
The minimum investment norm of Rs 1 lakh will ensure that investors with proper understanding of the risk involved in such investments will invest.