BackSebi expected to review SME trading, listing norms
The move comes as part of Sebi's attempts to further boost a segment that has seen impressive growth since its launch nearly three years ago
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Mumbai: The Securities and Exchange Board of India (Sebi) is expected to review norms related to trading and listing of small and medium enterprises (SMEs) as part of its attempts to further boost a segment that has seen impressive growth since its launch nearly three years ago.
According to stock exchange officials and merchant bankers specializing in SME issuances, market participants have asked the regulator to lower the minimum trading lot size of ₹ 1 lakh post listing and review the minimum 25% equity dilution, which is required at the time of listing.
The capital market watchdog is keen to make the segment more conducive for issuers and investors, and has reacted positively to the suggestions, said two people who were part of the discussions between the regulator, exchange officials and market participants. They declined to be named.
An email sent to Sebi on Tuesday remained unanswered.
Last week, speaking at an investment seminar, Sebi whole-time member Rajeev Agarwal said the regulator wants large SMEs to list and explore the capital market for funding.
Both BSE Ltd and National Stock Exchange of India Ltd (NSE), launched separate SME platforms in March 2012 after Sebi announced easier listing and disclosure norms to help smaller companies tap the capital market. BSE has 83 companies listed on its SME platform, while NSE has only six.
The market capitalization of the six companies listed on NSE’s SME segment called Emerge is nearly ₹ 400 crore while that of companies listed on BSE is ₹ 8,808 crore. BSE saw the market capitalization of its SME segment cross ₹ 10,000 crore on 12 December last year.
To expand the segment further, one of the concessions that exchange officials and bankers are seeking is a review of the requirement to dilute a minimum 25%.
“This is one of the most common concerns that we come across during our road shows across the country. SMEs do not want to test the waters with a high amount of dilution. Also, they feel that the minimum lot size of ₹ 1 lakh could deter many genuine investors," said an exchange official, who did not want to be named as the issue is still under consideration.
Merchant bankers add that the attempt is not to dilute the overall policy of ensuring a 25% public float for listed entities. They suggest that Sebi consider a lower minimum dilution at the time of listing, while specifying that a public float of 25% has to be ensured whenever an SMEs plan to migrate to the main board.
“A policy reform required is to dilute the norm of minimum public shareholding from 25% to 10% for SMEs. This is desired considering the mismatch between valuation of niche businesses run by promising SMEs and their immediate funding needs," said Mahavir Lunawat, managing director, Pantomath Capital Advisors, a merchant banker specializing in SMEs.
Exchanges are also suggesting that the class of investors allowed to invest in SME issues be widened.
For instance, BSE has suggested to the regulator that the definition of nominated investors be widened to include wealthy individuals, non-institutional investors, corporate bodies and merchant bankers, the exchange said in response to an emailed query.
Currently only institutional investors like mutual funds, private equity and venture funds are allowed to invest and trade in companies listed on the SME platforms.
“There are certain other policy changes such as lower trade size post listing and lower underwriting levels. The regulator can look at gradual relaxation with adequate safeguards related to liquidity, investor protection and merchant bankers’ commitment etc," says Lunawat.
Lunawat, who has managed more than 10 SME issuances, added that Sebi should encourage dual listing of SMEs on both BSE and NSE’s SME platforms. Currently, SMEs can either choose BSE or NSE to list.
A BSE spokesperson said the exchange has submitted certain other suggestions as well, which include making market making mandatory for a minimum of 5-10 years instead of the present three-year period. A market maker is a firm that accepts the risk of holding a certain number of shares of a particular security to facilitate trading.
The change in regulations being suggested come at a time when interest in listing on the SME platforms of BSE and NSE is rising.
There is a fair amount of traction in the SME segment and the exchange is engaged with nearly 50-60 such entities, mostly from the manufacturing sector to ensure better quality, said Ravi Varanasi, chief of business development at NSE.
As many as 19 companies have filed draft listing documents with BSE, said a spokesperson for the exchange.
In comparison, there have hardly been any initial public offers by large companies in the main market in recent years. According to the NSE website, there were a total of only 13 IPOs in 2013 and 2014.
Regulatory norms require companies that want to be listed on the SME platform to file a draft document only with the stock exchange and not with Sebi. Such companies also enjoy more liberal requirements for disclosure of financial numbers compared to the entities listed on the main bourse. However, these companies can choose to eventually switch over to the regular equity trading platform.
“Companies can migrate to the main board after two years of listing and fulfilment of certain criteria like paid-up capital of more than ₹ 25 crore. It is voluntary and some companies might evaluate since it’s over two years since the segment was launched. Market participants continuously engage with the regulator to give feedback and suggestions on the regulatory aspect of the SME segment," said Varanasi.
Three of companies—SRG Housing Finance Ltd, Bronze Infratech Ltd and Anshu Clothing Ltd—have completed two-and-a-half years on the BSE SME Platform and have applied for migration on the main board of BSE, said the BSE spokesperson.
Last month, speaking at an event organized by the Association of Investment Bankers of India, Sebi chairman U.K. Sinha had said that merchant bankers should look at SME entities more seriously as they offer “large untapped potential" and that Sebi, along with the Indian Venture Capital Association and Small Industries Development Bank of India, has been visiting cities to understand the needs of SMEs.
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