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Thursday, Oct 02, 2003

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Pursue listings with caution

THE BOMBAY STOCK Exchange relaxing the listing norms appears an attempt to shore up its share of trading revenues. By lowering the equity and market capitalisation thresholds, the BSE has made an about-turn after it tightened the listing norms in the wake of market troubles in the mid-1990s and 2000. The BSE had raised the equity as well as market capitalisation levels to stem the tide of small companies of doubtful credentials that crowded its trading list. Thus, till about four months ago, only one-eleventh of the companies listed saw regular trading.

Now, as the BSE embarks on the attract-the-small-company strategy, it must ensure that it does not let in, yet again, dubious companies. If this happens, it could do more to damage its position as investors may find themselves shortchanged as they were for much of the 1990s. The BSE cannot afford any more knocks to its credibility. Notably, over the past three years when the BSE had stringent entry norms, and also enhanced the quality of the pre-listing process, by running a check on the company's operations and credentials, the quality of IPOs hitting the market has improved vastly. Capital mobilisation through IPOs by companies of doubtful credentials have been few and far between. In its renewed efforts to expand the trading list, the BSE must not nullify this gain. Else, it may find itself at a disadvantage vis--vis competition even if the number of companies listed with it is high.

In this context, the BSE's plan to run a check on the company by independent professional firms and also place such stocks in a separate trading category should be an adequate check. The BSE must also have in place a system of surveillance of such companies as there is much room for sharp price moves on small volumes. As for small, unlisted firms, the BSE's move does offer them an avenue to get a listing that could improve their marketability, especially abroad. As some of the small-cap firms are likely to grow, a listing could help them in fresh capital mobilisation, and in pursuing growth through acquisitions. Both India Inc and the BSE can benefit in the new framework, but only if the BSE realises that the credibility and marketability of its trading platform is determined more by the quality of stocks than their number. In a bullish market, the latter may appear to be an advantage. But across market cycles, it could be a double-edged sword.

The BSE is pitching its move as one intended to give small companies a listing platform. But the proximate aim appears to be to find newer avenues to regain the lost market share. The BSE had caught up with the NSE in 1999-2000. But post-Ketan Parekh crisis of 2000, and troubles surrounding its former president, Mr Anand Rathi, the BSE found its market share in spot trading shrinking. Despite the brand equity of the Sensex, the BSE has not made its presence felt in the derivatives market. The ongoing bull phase has brought back about 1,000 companies on to the BSE's trading list and boosted trading volumes by a few hundred crore rupees. If it is this factor that had induced the BSE to aggressively target small companies and offer them a listed status, the need for caution cannot be over-emphasised.

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