Do we need an SME Exchange?

• India has more than 5000 listed companies of which only 2000 companies get traded daily  
• Many small and medium sized companies those get traded have a higher impact cost due to poor liquidity thereby impacting investors’ returns.
• Many small sized companies, who tapped the market in the past, have taken away investors’ money resulting in huge crisis of confidence amongst retail investors.
• The OTCEI, which is an exchange for small enterprises, was set up way back in 1989, but failed miserably despite adopting some of the best practices then.

Despite the four points mentioned above, three exchanges in the country, the BSE, the NSE and MCXSX are launching a platform/new exchange specifically catering to medium and small sized companies in the country. One would wonder going by the above mentioned information if there really is a need for SME exchanges that could serve any meaningful purpose of investors and the economy.
We at DSIJ believe that there is a need of exchanges for the SMEs as many small time entrepreneurs in the country are not able to expand their business for want of capital at a reasonable cost. However the same has to be done with appropriate checks and balances in place.

For a country like India where normal borrowing cost always goes in double digits, where capital is scarce and means to finance business ideas are few, the capital market for SMEs would be a real boon. Entrepreneurship runs in the blood of Indians. Today many great ideas could not become a reality for want of funds. Also SMEs provides jobs to millions of people. They also contribute around 20 per cent to the country’s GDP and hence if India needs to grow SMEs also need to grow. In fact, India could retain its cost competitiveness in many fields mainly due to SMEs who are providing products and services at a much cheaper cost.

Having said that, past experience of investing in SMEs has not been very encouraging. In fact no one knows what has happened to companies that raised money from the public through the OTCEI. These companies are not traceable and investors are not even getting annual reports or dividends from any of them. Also, many small sized companies that came and tapped the market and got listed on the main exchanges are today suspended due to lack of fulfilling listing requirements. In fact, Indian investors must have lost near about Rs 1000 crore investing in small sized companies.

If one goes through the list of IPOs of the companies that tapped the market in 2011, there is one common thread and that is about small sized companies which have seen horrible erosion in their share price post listing resulting into huge losses to investors. Another problem that is being face is that many of the small sized counters are manipulated by vested interests resulting in retail investors taken for a ride.

Also, corporate governance has always been an issue with SMEs as these companies are neither able to rope in prominent and independent directors on the board nor are their financial disclosures up to the mark. So any investor investing in an SME would always needs to be wary of what is in store for him. In fact according to a SEBI guideline in its model listing agreement it has given relaxations for companies listed on the SME exchanges/platform on disclosures. SMEs can declare financial results every six months instead of every quarter. Also SEBI has relaxed norms where the company need not publish the results in the newspaper but needs to make it available on the company’s website. We are not sure how many investors would be interested in companies where financial performance would be available every six months in a world where even quarterly numbers seem to be too long a period.

Till now we have not seen a single company making an IPO on the SME exchange. In a discussion with us Lakshman Gugulothu in the month of October indicated that the BSE SME would go live by the second half of November but it is yet to take off. There are no announcements from the NSE on the launching date for their SME platform while MCX SX is sorting out some legal issues before it can start its exchange operations.

While we strongly believe that SME exchanges are needed, we also believe that exchanges will have to work hard to ensure that good quality with good management companies tap the market at reasonable valuations to make the concept popular. If that does not happen we would again see one more failed attempt to revive the fortunes of SMEs.

Key Points

• There are quite a few SME exchanges in the world. Some of the prominent ones are the NASDAQ, the AIM of London and the GEM of Hong Kong.
• India’s first OTCEI exchange started in 1989 but failed miserably
• Minimum equity capital to get listed on Indian SME exchange is Rs 50 lacs
• There are two threshold limits set for capital raising. One for Manufacturing and the other for the Services sector
• Once a company is listed on the SME exchange and its equity capital crosses the limit of Rs 25 crore it can opt for the main exchange listing
• BSE has 3723 companies with an equity capital of less than Rs 25 crore
• The companies listed on the SME exchange can publish results on a half yearly basis instead of quarterly basis
• There would be market making on the SME exchanges to ensure enough liquidity
• Minimum 50 investors with each one investing Rs one lac will be needed to get listed on the SME
• Today India has the largest number of listed companies in the world