Market regulator Securities and Exchange Board of India (Sebi) has laid the groundwork to allow small and medium enterprises (SMEs) to list on SME exchanges.
SMEs have always complained of difficulty in accessing to both debt and equity capital. While the government has taken several measures to ease access to credit, giving them easier access to equity is the next step in that process. Will SME exchanges succeed is the big question, since previous efforts have not worked. Cliched though it may sound, its success depends entirely on the companies, intermediaries and investors.
The criterion for listing companies on SME exchanges needs to be changed. At present, Sebi has mandated that the maximum limit for being listed will be Rs25 crore. Beyond that, they will have to migrate to the main stock exchanges. Rather than a paid-up capital limit, it would be more appropriate to have a market capitalization criterion. The first criterion will be the size of the initial offer. The paid-up capital is a static figure, whereas the market cap could go much higher, depending on a company’s performance.
The quality of issuers will be one draw for investors. Liquidity is another key criterion. Investors will be keen to participate in issues only if there is enough liquidity. The Rs1 lakh minimum lot size will be a stumbling block. Even good but small companies on the main stock exchanges see poor volumes. Sebi’s intention is to ensure that only high net-worth investors—who can take risks and may be more knowledgeable—enter this market. But they may not be enough to provide enough liquidity, without which issuers and investors will soon lose interest.
A merchant banker plays a very important role in this market, since Sebi will not vet these issues. The eligibility norms have been relaxed, too. The banker also plays the role of a market maker in the stock. While this will hasten the process of listing for companies, the regulator should put in measures to penalize merchant bankers in case investors lose out because of fraud.
The success also depends on how stock exchanges approach this. They should study the London Stock Exchange’s AIM (alternative investment market) model, which has been successful in marketing the concept even to international companies. They will need to reach out to good SMEs and convince them to list on their stock exchanges, rather than the current approach of setting up an exchange and waiting for issuers to queue up. That will ensure a better quality of issuers.
Sebi has not unduly diluted disclosure norms for SMEs. While issuers will report half-yearly results instead of every quarter, they will have to follow the other corporate governance requirements applicable to listed companies.
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