The Hindu Business Line : Not a capital idea

On the face of it, the proposal of the Multi Commodity Exchange of India Ltd (MCX) to start a separate stock exchange for small and medium companies is evidence of a continuing belief that a large enough market in shares of such enterprises exists and that creating a trading platform and to meet the needs of users of such services is a viable business proposition. This, however, flies in the face of evidence. The Over the Counter Exchange of India (OTCEI) set up precisely for this purpose some years ago floundered despite having leading financial institutions as its promoters and investor-friendly trading technology and operational features. There is also the phenomenon of small- and medium-cap stocks at the bourses today which though larger than the companies that are targets for the new exchange do not enjoy much investor support either in terms of a deep market or being valued at higher multiples of current earnings than their large-cap counterparts.

Conceptually too there is no compelling reason for an exclusive market for shares in small and medium enterprises. The intermediaries in mainline exchanges can handle the requirements of sustaining a secondary market in SME stocks. If necessary, intermediaries to cater to the needs of investors in these stocks can be enrolled with limited trading privileges and reduced capital adequacy and exposure norms. Also, the trading platform, which automatically matches buy and sell orders and delivers a trading solution, is indifferent to the order size. It costs only as much to match an order worth Rs 50,000 as one of only Rs 1,000. Indeed, the mechanism is also asset-class-neutral in the sense that the trading platform can handle orders for equity just as efficiently as for agro-commodities. One could even think in terms of a market structure that offers under one roof financial products in stocks, commodities, government securities and derivatives thereof and members with comprehensive or limited trading privileges depending on their capacity and subjected to exposure norms appropriate for the financial exposure their trading entails.

If the regulatory issues and aspects of jurisdiction need time to be sorted out, the MCX's case for setting up such a market can be considered favourably. After all, that the traditional wisdom holds as unviable the business model for a standalone market for SME stocks is no justification for denying MCX the privilege of setting one up should it want it. In any case, there is a proposal with the Government for restructuring the OTCEI to enable it to cater to the requirement of SMEs under an alternative regulatory framework to that of the mainline exchanges. Competition can only help the cause of retail investors such as there are.