The capital market regulator is expected to soon issue final guidelines for setting up a trading platform exclusively for SMEs.
Small and medium enterprises (SMEs) may soon get stock exchanges for themselves. The issue, which has been under discussion for almost two years, is critical; SMEs are not able to raise capital through the market, since they cannot meet the listing and trading requirements of the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE).
The Securities and Exchange Board of India (Sebi), the capital market regulator, took an in-principle decision exactly a year ago to set up a separate exchange for SMEs. It is learnt that very soon it will announce the final guidelines for such an exchange, and all three leading stock exchanges are preparing to launch platforms for SME stock exchanges.
Sebi had advocated a separate exchange for SMEs and invited applications for setting one up. It had said the exchange should register under the Securities Contracts (Regulation) Act and its members should register with Sebi. The exchange will help small- and medium-sized companies to raise capital, especially when they do not have the required track record. Sebi has favours more than one such exchange.
“The SME exchange is an issue we are looking at and when we feel that necessary conditions are in place, we will allow it,” says C B Bhave, Chairman of Sebi, without revealing the timeframe by which the final guidelines will be issued.
By now three mainline stock exchanges— NSE, BSE and the Financial Technologies group’s MCX-SX— have applied to Sebi to set up a trading platform for SMEs. NSE is creating a separate entity for setting up a SME exchange and has roped in the Small Industries Development Bank of India (SIDBI) and other equity partners, including IL&FS, IDBI Bank and State Bank of India.
Sebi has set a Rs 100-crore net worth criterion for those wanting to set up a separate SME exchange, a condition not difficult for NSE to meet, since it has a strong balance sheet. The exchange also meets all other criteria set by the regulator. These include having an online system with disaster recovery, surveillance mechanism, arbitration mechanism, proper risk management systems and a separate clearing house. NSE is setting up a separate exchange but trading will be done on its existing platform.
Selection of partners is aimed at leveraging the network and clients of banks like SBI, IDBI and SIDBI, which are the top lenders to this industry segment. MCX-SX, a new entrant in the stock exchange business, which has the potential to provide strong competition to the NSE, has adopted a hub-and-spoke model. It has signed a MoU with the Associated Chambers of Commerce and Industry (ASSOCHAM), which perhaps has the largest number of SMEs as members.
The idea is to educate probable beneficiaries and market the exchange and the fund-raising possibilities directly to them. MCX-SX’s model involves directly approaching the SMEs. ASSOCHAM will also help educate small enterprises about the benefits of the exchange.
While the BSE has the first-mover advantage in launching a separate trading platform for SMEs, known as IndoNext, it has not been able to capture the segment due to lack of effective marketing in smaller cities, where most SMEs are located. Now BSE is said to be planning a segment dedicated to trading for SMEs, unlike NSE, which is setting up a separate exchange.
Three years ago, BSE had created IndoNext along with the Federation of Indian Stock Exchanges, to enable SMEs to raise equity and debt, and facilitate trading in these instruments. The Over the Counter Exchange of India (OTCEI), now a defunct body, had been set up for this purpose, but it was ahead of its time and did not pick up. There was also no anchor investor to drive the exchange.
The design of the SME exchange may differ from exchange to exchange, but it may be less liquid than the mainline exchanges’ cash segment, fewer investors may invest in issues floated by SMEs, and the amount raised per issue may be much lower than other issues. It will not be loosely regulated, but the disclosure norms may be simpler. The key to success will lie in marketing. SMEs need to be nurtured properly; they have to be educated about the need to become transparent and investor-friendly, and to service investors.
The government and the regulator seem to be going slow, since there is a need to ensure that SMEs are not over-regulated and yet investors’ interests are protected. Sebi has already proposed that only entities having nationwide networks can run such an exchange, and that retail investors should stay away from such an exchange, since the risk levels are too high. Institutions and high net worth individuals are seen as potential investors.
