The Hindu Business Line : A less stringent market for SMEs

The discussion paper on developing a market for SMEs put up on Securities and Exchanges Board of India (SEBI) website includes some proposals that might ensure that the market for SMEs finally takes off in our country.

The paper has identified – prohibitive cost of initial public offer, the delay that it entails and the need for a prior track record — as some of the impediments that smaller enterprises are currently grappling with.

These concerns have been adequately addressed in the proposed exchange.

The most striking proposal by SEBI is the one to do away with Disclosure and Investor Protection (DIP) guidelines. As per these guidelines, companies seeking to list on stock exchanges in India need a track record of a minimum of three years in making profits and paying dividend. Since many small and medium companies that need to raise funds might not have been operational for the required number of years, doing away with these guidelines can aid companies that seek to raise funds for the incubation phase.

SEBI has also proposed that the offer documents would not be vetted by it. This will speed up the listing process and give greater flexibility with regards to the disclosures made in the offer document.

Fewer disclosures would, however, mean that the investors need to be cautious while subscribing to the companies listed on this exchange. This model of allowing fewer disclosures has already been tried successfully in Alternate Investment Market (AIM), London. When asked about the risks associated with fewer disclosures in AIM listed companies, Mr Daniel Mackelden, Head of London Operations of international law firm Cains, had said that the institutional investors who invested in these companies ensured that adequate disclosures are made on all fronts.

One way that an investor can decide on an investment in stocks in SME market could be by looking at the kind of institutional investors who have taken an exposure to the stock.

The higher the stake of institutional investors, the better the disclosures are likely to be.

Another leeway proposed to be allowed to companies seeking listing on the SME market is that they can publish earnings every six months instead of every quarter.

This would reduce cost as well as put lesser pressure on the companies to show growth in earnings every three months.

Since investors in this exchange are envisaged to be long-term institutional and HNI clients, quarterly reporting can be easily dispensed with.

The new market could however face a few challenges in its initial stages. The foremost test would be the way in which investors and promoters perceive and adjust to the fewer disclosure requirements.

Needless to add that less regulation would make investment in such exchanges highly risky for unsophisticated investors. With a view to deter small investors, SEBI has proposed a minimum subscription limit in the initial public offering (IPO) as well as the trading market lot to Rs 5 lakh. This ceiling would keep away retail investors, who cannot carry out adequate due diligence.

While the high limit of Rs 5 lakh secondary market trading on the exchange could protect small investors, it could impact liquidity. It is of course a well-known fact that efficient price discovery can take place only if there is ample liquidity.

Price manipulations would be rather simple in stocks with low volumes. Lack of liquidity can also be a deterrent to promoters contemplating raising funds on the SME market.

Another limiting factor for this exchange would be that the minimum post-issue share capital.

The current capital requirement for companies seeking listing on the Bombay Stock Exchange is Rs 3 crore, which is well below the maximum limit of Rs 25 crore proposed for the SME market.

As a result, smaller companies with adequate track record and willing to take on the required listing expenses would rather prefer a larger exchange such as BSE with higher liquidity and better visibility.

The regulator has made adequate provisions to ensure that the new exchange does not go the way the other experiments such as OTCEI and Indonext did. The success of this exchange would now depend on how well companies take advantage of the relaxed guidelines without misusing it. — Lokeshwarri S.K.

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