Markets regulator Sebi might make SME listings easier

Aims at lower costs for issuers, reducing the obligation on investment bankers; says willing to think ‘out of the box’ on more ways

The Securities and Exchange Board of India (Sebi) is willing to make it easier for small companies to list on the dedicated small and medium enterprises (SME) platforms of stock exchanges, by relaxing certain criteria such as on underwriting and market making.

The regulator wants the platform to be more cost-efficient for issuers. It also wants to bring down the obligation on investment bankers (i-bankers) to attract more participants in this space.

“Sebi is open to review of the SME guidelines, to address the needs of various stakeholders, including merchant bankers, investors and issuers. We are happy to think completely out of the box for bringing in further measures,” said S Raman, executive director, Sebi, on Monday at the ‘Emerge Stakeholders Conclave’ organised by the National Stock Exchange (NSE).

He said Sebi was open to revisiting requirements like those on market making or underwriting for i-bankers.

Many i-banks have stayed away from taking SME mandates as Sebi has prescribed strict obligations on them. Currently, investment bankers have the responsibility of market making for a minimum period of three years for SME initial public offerings (IPOs). Also, the issues have to be fully underwritten by i-bankers and they have to underwrite 15 per cent of the issue size through their own account.

Raman said the underwriting obligation for SME IPOs could be removed. However, issues won’t be able to go through if they failed to garner a minimum of 90 per cent subscription. He said Sebi is also mulling whether the market making requirement could be brought down from three years to about a year.

“Sebi has had intense discussions with exchanges and bankers in the last two months. There could be some relaxations made soon,” said Abhay Bongirwar, managing director and chief executive officer, IDBI Capital.

The regulator could also prescribe a lower dilution requirement for promoters. Under the current norms, issuers have to dilute a minimum of 25 per cent equity through SME IPOs. Raman said, “A lot of issuers have expressed a desire to divest as little as possible, so that once the company starts growing, the issuer can sell the stake at a higher level.”

He said Sebi might consider the pre-issue shareholding of private equity and venture capital investors as public holding as long as it isn’t “promoter holding in disguise”.

The regulator has also got feedback from market players to reduce the minimum investment size for retail investors. For SME issues, the minimum size for retail is Rs 1 lakh, unlike other IPOs where it is Rs 10,000-15,000. I-bankers said the minimum investment size was deliberately kept higher for SME IPOs to keep away very small investors, given the high degree of volatility.

Launched almost a year earlier, the SME platform for smaller companies — having capital of less than Rs 25 crore — is yet to take off. Only two companies have listed on Emerge, the NSE’S dedicated platform for SMEs, and about a dozen on the Bombay Stock Exchange.

The exchange platform for smaller companies has proved to be successful in a lot of markets globally. For instance, Canada’s TSX Venture Exchange has trading in nearly 2,500 companies. London’s AIM and South Korea’s Kosdaq have a little over 1,000 companies each listed. Stricter regulatory requirements and heavy expenses for marketing of issues have kept a number of small companies away from using the SME platform for listing.