Interconnected Stock Exchanges of India Ltd has applied to market regulator Securities and Exchange Board of India (Sebi) for setting up the proposed special stock exchange that will list all small and medium enterprises (SME).
With this, there are three players in the fray for the much-awaited SME exchange. A final decision is expected soon with market sources not discounting an announcement in the Union Budget on 28 February.
“We have written to the market regulator about setting up an SME exchange. Our network of over 800 members and presence in over 135 cities spread over 24 states makes us ideal for successful running of the SME exchange,” said V. Shankar, managing director, Interconnected Stock Exchanges of India. The two players who have already applied are the ailing Over The Counter Stock Exchange of India and Financial Technologies.
The Over the Counter Exchange was the original bourse for small companies, but in the absence of investor support, it has not seen any trading for some years. Financial Technologies has successfully promoted Multi Commodity Exchange (MCX), one of the largest commodities exchanges in India.
Sebi chief M. Damodaran had recently said setting up a regulatory framework for creating an SME exchange was an important item on his agenda for 2007. It is not clear if the regulator would mandate setting up of just one SME exchange or allow multiple players.
Interconnected Exchanges was promoted by 14 regional stock exchanges in 1998 to widen the market and increase liquidity for securities listed on them, in the face of domination by the technologically superior National Stock Exchange and Bombay Stock Exchange. However, the experiment did not take off successfully, following migration of larger companies to bigger stock exchanges while smaller companies either de-listed or disappeared.
Interconnected Exchange floated a subsidiary to facilitate cheaper access to NSE and BSE trading terminals for members of the regional stock exchanges . At present ,over 300 members of 14 regional stock exchanges and 500 additional members trade on BSE and NSE through Interconnected Exchanges network, accounting for about 2% of the total trade in the Indian market.
At present , there are no avenues for listing SMEs. The minimum networth requirement for a company to list on NSE and BSE is Rs25 crore, with a profit track record for the last three years. But in reality, there is hardly any company with networth of less than Rs 50- 100 crore that currently manages to list on the country’s two premier stock exchanges, say industry observers. This is constraining smaller companies from accessing capital, either through venture capital or direct listing. Venture capitalists and private equity funds are avoiding funding smaller companies if they are not sure the company will grow to a size of at least 100 crore in the three to four year time period they are invested in and they are able to exit the company through a listing on stock exchanges.
“There are not many companies that can grow to Rs 100 crore size in such a short period. The situation is not encouraging for smaller companies, especially in the fields of technology, which require early funding, “ said one merchant banker. Those small companies that manage to attract venture or private equity funding now do so at considerably higher cost. They will have to guarantee exit to the funds either through buy back of shares, if the company fails to list on exchanges within a specified timeframe or else dilute further control by placement with other funds and allow the funds to dictate how it runs its business.