Exchanges battle now shifts to SME platforms

Exchanges battle now shifts to SME platforms

Mumbai: The battle between Bombay Stock Exchange Ltd (BSE), Asia’s oldest bourse, and rival National Stock Exchange of India Ltd (NSE) is shifting to a new ground—the platform for small and medium enterprises, or SMEs.

In May, capital market regulator Securities and Exchange Board of India (Sebi) allowed BSE and NSE to launch exchanges dedicated to SMEs. There are an estimated 26 million of them in India.

Once SME exchanges are operational, these firms will be able to raise money relatively easily; listing norms on these will not be as stringent as they are on the main exchanges. Both BSE and NSE have received in-principle approvals from the regulator to launch their SME exchanges.

A company with a capital base of less than 10 crore is allowed to be listed on the SME exchange with easier listing norms, including submission of results only every six months and exemption from releasing detailed annual reports, among others.

For listing on the main bourse, a company needs net tangible assets of at least 3 crore in each of the preceding three full years, distributable profits in at least three of the immediately preceding five years and a net worth of at least 1 crore in each of the preceding three full years.

Quarterly reporting is the norm on the main exchanges.

Both bourses see an untapped market in the SME exchanges and say the change will be similar in magnitude to that brought about by the introduction of derivatives a decade back.

NSE currently controls almost the entire equity derivatives market, which recorded a turnover of about 24.4 trillion in June, several times the cash market.

While BSE is banking on the migration of a large number of suspended scrips from the main bourse to its proposed SME exchange, NSE plans to introduce unique trading systems to ensure adequate liquidity for the newly-listed, but lesser-known firms.

Trading in 1,404 companies has been suspended by BSE for more than a year now for non-compliance of listing norms, including non-submission of quarterly financial results, shareholding patterns and corporate governance reports, and because of unresolved investor complaints.

Most of these firms are small, but are eligible for listing on the SME exchange.

BSE had earlier given these firms time till June to comply with the norms. Subsequently, the deadline was extended to 1 October. The migration will give BSE a head start in the business. So far, 200 companies have approached the exchange for migration. BSE will have to lift the suspension on companies it wants to migrate to the new exchange.

In contrast, NSE, which has suspended trading in 147 firms for non-compliance of norms, doesn’t want them on its SME exchange. “This is not a platform for suspended companies," said an NSE official, who did not want to be identified because he is not an authorized spokesperson for the exchange.

According to NSE, SMEs are lesser-known to investors, giving rise to the risk of illiquidity. To avoid this, and to curb intraday volatility and enable better price discovery, the exchange plans to offer the “call auction" method for trading in such stocks.

A call auction is an order-driven facility that clubs multiple orders together for simultaneous execution of a trade at one price, and at a predetermined time.

In continuous trading, a transaction can happen whenever there is a price match between a buy and a sell order.

Globally, the call auction trading method is typically used along with continuous trading. Sebi allowed call auction trading last year and both BSE and NSE use this for 15 minutes before the normal market session—continuous trading—kicks in. This prevents excessive volatility in stock prices and enables price discovery.

NSE plans to offer an intraday call auction facility for listed SMEs.

In the run-up to the listing, in an effort to help SMEs get suitable incubators and investors, NSE has also been meeting venture capital and private equity funds over the past six-seven months. “It is working as an interface between these funds and SMEs. The exchange is identifying all high-innovation SMEs that have high growth prospects," said the NSE official.

NSE, according to this person, will be selective about picking firms for its SME platform. It plans to independently assess the financial health of such companies before they list, going beyond Sebi norms.

“It is important to ensure that the companies listing on the SME exchange platform are in a healthy financial state. NSE is engaging with a number professionals who are either working or have worked with banks and financial institutions in the areas involving SMEs. NSE will take into account their views before enabling a company to list on its SME exchange," the official added.

BSE’s approach is different. It recently started roadshows across India and is partnering with regional commercial and industrial chambers to attract SMEs. The exchange is also asking its trading members to get empanelled as market makers—a mandatory requirement prescribed by Sebi.

A BSE official said the exchange isn’t planning a special trading system for the proposed SME platform. He added that “it is entirely the merchant banker’s job to assess the financial aspects of the SMEs and find them investors". He asked not to be identified because the exchange’s plans are not yet in the public domain.

If BSE allows suspended companies to get listed on its SME exchange, retail investors who have shares in these may find an exit option and market makers could acquire them. According to Sebi norms, a market maker is to buy the entire shareholding of an individual shareholder in one lot if the value of such shareholding is less than the minimum contract size. On the SME exchange, the minimum contract size is 1 lakh.

Still, it isn’t clear how BSE will deal with the suspended companies.

According to Sandeep Parekh, founder of legal consultancy firm Finsec Law Advisors and a former Sebi executive director, even shares of suspended companies fall in the category of listed shares for all legal purposes. Thus, a suspended company may argue that it falls in the listed category and can pass a shareholder resolution approving migration to the SME platform, without getting its existing suspension revoked.

A second BSE official, who didn’t want to be named, said: “They (the suspended companies) have to (get the exchange to) revoke the suspension. As of now, that is the decision."

“It really depends on the rules of listing, but since multiple listings are allowed, I don’t see any problems for a firm to be listed on two platforms even if it is suspended in one of them," said Rajesh Chakrabarti, assistant professor of finance at the Indian School of Business, Hyderabad.

According to Parekh, delisting should be done and retail investors given an exit option. “It is philosophically wrong even if legally permissible to move a defunct company to a new platform. This will create what is called a ‘market for lemons’ where honest SME companies will also be distrusted."