The Bombay Stock Exchange’s new exchange for small and medium enterprises (SMEs) will go on live in September 2011. The exchange has set a target of roping in 500 members and breaking even in five years. In an interaction with T E Narasimhan, Lakshman Gugulothu, chief executive officer, BSE SME Exchange, talks about the salient features of the exchange.
How different is the new exchange from the main board?
First, issues will be 100 per cent underwritten and this means that they will be 100 per cent success. Second, there will be support for three years in the secondary market through market making activity. Third, SMEs with a paid-up capital up to Rs 10 crore can list on the SME Exchange, compared to Rs 10 crore or more for the main board.
The listing norms have been simplified. The issuer has to take the approval of the exchange and Sebi approval is not required. A copy of the offer document will be sent to Sebi for information. Financial results are to be submitted on a half-yearly instead of a quarterly basis; and they need not be published, as required in the main board, but can be made available on SMEs’ websites. SMEs can send their profit and loss account and balance sheet to shareholders instead of the full annual report.
Issue expenses on marketing and stationery will be minimal. However, the issue will be charged for underwriting, sub-underwriting and responsibility of three years’ market making. The other major factor is that SMEs with paid-up capital between Rs 10 crore and Rs 25 crore have the option of listing on either the main board or the SME Exchange.
What kind of preparedness is required for listing on the SME exchange?
Keeping annual reports ready, documenting past performance, due diligence on the applicability of various regulations and approvals required from regulatory bodies, documenting the risk factors associated with the company and the external environment affecting the company.
How do you see the future of the SME exchange?
There has long been a need for an SME exchange to raise equity capital. The BSE SME exchange is going to bring the entire pool of investors on a single platform and it will be easier for SMEs to raise capital through this platform in a cost effective manner. And they have responded positively in a big way.
How is an SME exchange going to help smaller firms?
A dedicated exchange for SMEs will help them find a solution to their financial requirements for expansion. Listing on the exchange gives better valuation to a company. Debt and equity ratios will improve and the balance sheet will look much healthier. Transparency and corporate governance will improve.
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Listed SMEs will gain visibility among investors, the investor base of the company improves, and listed companies will have easier access to alternate funding options. Banks, PE funds and other financial institutions will provide loans easily. Fundraising through ADRs and GDRs become easier. Companies can raise more funds through follow-on public offerings.
What is the outlook for market participants in the SME platform?
Merchant bankers are optimistic. Members who have experience of market making are optimistic about the scope of market making in this segment. As for SMEs, they are enthusiastic about the opportunity to raise equity capital.
What problems are likely to be faced in launching the exchange?
The concept of an SME exchange is new to the country. SMEs are not well informed on capital market issues and the modalities of raising equity capital. There is need for awareness programmes.
Merchant bankers have handled only primary market issues so far. On the SME platform, they will have to assist companies in the secondary market through market making for three years. Merchant bankers, issuers and market makers will have to work as a team for three years to make market making a success. This is a huge challenge.