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SME Exchange - The New Kid on the Block

Posted in Finance Articles, Total Reads: 10656 , Published on July 10, 2013

It’s a dream of every company to have its shares listed on a stock exchange , trading at a fast pace, seeing the market value hitting sky high prices giving a strong market capitalization and a respectable position to the buyers. But it takes years to reach that stage where you can even think of taking that decision. Just Dial, launched 15 years ago, took the decision only recently and it has been a profitable one. But, can the emerging Micro, small and medium enterprises which are currently 4.88 cr in units think of such a decision? Can emerging start-ups whose founding members are found in the offices of Venture Capitalists and Angel investors convincing them of their fruitful idea can list them on some exchange. The answer is a definite Yes. At least that’s what has the finance minister has made it possible in the Budget 2013 after opening a backdoor listing route for SMEs including start-ups at the two SME exchanges opened last year by both BSE and NSE.


The Seed

For efficient capital structure decision, an optimal mix of equity and debt is essential. Keeping the same in mind the Report of the Task Force on MSME Chairman had recommended the setting up of a dedicated Stock Exchange/Platform for MSMEs to access Institutional and retail capital rather than solely depending upon VCs and PE funds which takes a large stake in equity for funding. This would also enable the growing MSMEs to have greater financial inclusion in the country. Following this SEBI laid down the regulatory framework for the SME exchanges with relaxed listing conditions and accorded approval to BSE and NSE to launch an SME exchange in September 2011 and October 2011 respectively. Successful examples of SME exchanges across the globe includes AIM(London), TSXV(Canada), GEM(Hong Kong), Mothers(Japan), KOSDAQ( Korea) and NASDAQ(US).

In March 2012, both BSE and NSE launched their SME exchange platforms to enable MSMEs to raise funds and get listed as public entities. BCB finance Ltd was the first India SME to get listed on the BSE SME exchange. This was an epochal event for MSMEs as they have a huge listing potential but mostly had debt financing options. The launch would definitely give a boost to the ever growing MSME sector which is claimed to be the second largest employer after Agriculture and plays an instrumental role in the GDP of the country.

Why SME exchange?

An MSME also had the option of listing on the main exchange but there are advantages of using a dedicated SME exchange. The listing norms are written to specifically suit SMEs and Initial Public Offering is simplified which means the time taken to get your stock on the market is much less. Also a dedicated exchange gives a good visibility to the investor rather than finding the same on the small and mid-cap stock on a main exchange.

Ifs and Buts ?

The main problem for a share to do well at the exchange is that trading volumes should go up so that it is able to find a well-deserved price in the market. And this was the case with the OTC Exchange of India (OTCEI) which started in early 1990s but was not so successful due to poor trading volume. SME exchanges on the other hand are well integrated with already established main exchanges, BSE and NSE, hence the effort required to attract the investors would be less. The brokers and the sub-brokers network have already been established and these SME exchanges only need to leverage the existing structure. Still, getting enough liquidity is the prime-most concern for the companies listing on such exchanges and for that there are market making provisions.

The criteria of listing can be found on the website of the respective exchanges but just to highlight the main points, it requires a net Tangible assets of at least Rs. 1 crore as per the latest audited financial results. So naturally, you’ve got to have something in order to grow your business. You can’t just have an idea and expect things to turn on their own. But still, having such capital and struggling to find a good investor are the issues that SME exchange have addressed.

The Future

Since its launch I March 2012, 13 companies have listed with BSE SME exchange and BSE is negotiating with other companies for listing. BSE’s rival NSE has also followed suit and launched its own SME platform called ‘Emerge’ with the proposed listing of Chennai based SME Thejo Enginenering. A vibrant equity market for MSMEs would also provide an added incentive for private equity and venture capital investments by providing an exit option for them. Listing would further enhance the opportunity to offer equity ownership to their employees, thereby increasing their commitment to the company and working for future success.

The Article has been authored by Abhinav Bhatia, IMI, New Delhi





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