Small is beautiful, but for India’s two leading stock exchanges, it is proving difficult, too. Despite months of preparations, the trading platforms launched by the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE) for smaller companies have received only muted response in the month since.
Just one firm, BCB Finance, has got listed on BSE’s SME Exchange. Trading activity is almost negligible in the counter. Two more companies, Max Alert Systems and Monarch Health Services, have filed their prospectus with the bourse. They are likely to go public in the next two weeks, according to Lakshman Gugulothu, chief executive officer at BSE SME Exchange.
It is similar at NSE’s SME Exchange, called ‘Emerge’. This is yet to see its first listing. The exchange, which dominates equities trading in India, expects the Initial Public Offering (IPO) of Thejo Engineering on its SME platform “very soon”.
| DIFFICULT RIDE FOR SME EXCHANGES |
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Tough norms for merchant bankers bringing SME issues, a sedate equity public offerings market and regulatory action against some merchant bankers and promoters for IPO-related irregularities in December last year are key reasons behind a subdued initial response for SME Exchanges, officials say.
“The activity on the SME platform cannot be seen in isolation and has to be seen in the context of the overall sentiment in the primary markets. We are not worried about the numbers; our focus is to develop it as an orderly and credible market place,” a spokeswoman for NSE said. “The quality of initial transactions is being observed by all market players. There are several transactions in the pipeline and we expect the activity on the platform to grow each quarter from now.”.
To be fair, even bigger companies are finding it difficult to launch their IPOs at present. Just four new companies – MCX, Olympic Cards, NBCC and MT Educare – have listed their shares on the main trading platforms in this year so far, collectively raising Rs 884 crore.
Many merchant bankers are reluctant to bring IPOs on the SME Exchange due to cumbersome requirements like market making of securities for a minimum of three years after listing and full underwriting of the issue, officials say. Market makers provide both bid and ask quotes, helping bring liquidity to the counter.
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“The scope of unlimited risk associated with market making need to be addressed at the earliest. The risk has to be commensurate with the reward. It is difficult for market intermediaries who work on a fee-based model to take unlimited risk, as they are not investors,” said BSE’s Gugulothu.
“Definitely, there are certain obligations for merchant bankers on this platform, so they are trying to evolve sustainable business models around the platform, to help them meet their regulatory requirements,” said NSE’s spokeswoman.
According to details available on the BSE SME Exchange website, 15 companies have registered with the exchange as market makers. These include Asit C Mehta Investment Intermediaries, BCB Brokerage, IKAB Securities, Networth Stock Broking and SMC Global Securities, among others.
“An SME exchange is definitely a progressive concept. It will evolve over a period of time,” said Jagannadham Thunuguntla, head of research at SMC Global Securities, who believes a three-year market making period is required. “The basic idea is to ensure liquidity. When BSE IndoNext was started, volumes were not sufficient (in stocks listed on the platform).”
In 2005, BSE had launched BSE IndoNext for SMEs and companies listed on regional stock exchanges. The concept did not take off.
Despite a slow start for their SME platforms, both BSE and NSE are putting up a brave face. “This year could be taken as the development year for the new platform and we hope to see progress as we go along,” says NSE’s spokeswoman. On its part, BSE expects about 25 companies to list on its SME platform in the next six months.