Why do exchanges have a separate platform for SME stocks and how are they different from the mainboards of the BSE and NSE?
The post-liberalisation era that started in 1990, helped many companies raise funds easily through the capital markets. However, due to stringent entry barriers such as minimum paid-up capital of Rs 10 crore and profit track record, small and medium enterprises found it difficult to access the capital market.
To address the issue, the market regulator allowed the main exchanges to launch a platform for SMEs looking to raise funds to expand operations.
The BSE and NSE launched a separate platform (BSE-SME & NSE Emerge) in 2012. A company whose post-issue paid-up capital is not more than ₹10 crore is eligible to raise funds by listing on the SME platform.
The offer document in SME IPOs is not whetted by SEBI, and disclosures regarding filing of results, etc, is less stringent when compared with the main board.
Why are exchanges now planning additional surveillance mechanism for SME stocks?
Target investors on the SME platform are high networth individuals with deep pockets. It is with the intention of keeping small investors away from this platform that the trading lot size as well as the IPO application size have been fixed at Rs 1 lakh.
But given the impact of inflation, the Rs 1 lakh barrier has now become affordable to small investors too, leading to an increase in trading.
Especially, of late, SME exchanges have been witnessing hyper activity, with investors gobbling up almost all the issues. As the investor appetite grows, several SME companies have entered the capital market to capitalise on the euphoria.
Already, 135 companies have hit SME platforms this year, nearly four times the 35 issues on the mainboards (BSE and NSE).
Some IPOs have received a mind-boggling response from retail investors.
Kahan Packaging , a little-known Mumbai-based firm that manufactures polymer-based woven products, received bids for over 1,044 times from retail investors, and Chennai-based Basilic Fly Studio received bids worth ₹14,169 crore, as against the issue size of ₹66.35 crore.
This has also resulted in strong listing gains, defying the fundamentals.
Basilic Fly Studio Ltd listed at ₹271, a premium of 180 per cent against the IPO price of ₹97; shares of Telengana-based Srivari Spices and Foods jumped over 140 per cent on listing day at ₹101.50, against the IPO price of ₹42.
This frenzied behaviour has worried the exchanges and the market regulator SEBI, who fear that this could affect the integrity of the market and may pose systemic risks.
What measures have been taken by exchanges? How will they work?
The Securities and Exchange Board of India and exchanges, in order to enhance market integrity and safeguard the interest of investors, have been introducing enhanced pre-emptive surveillance measures such as a reduction in price band, periodic call auction, and transfer of securities to the Trade for Trade segment from time to time.
The exchanges have extended the short-term additional surveillance measure and trade-for-trade settlement framework to SME stocks. This will be applicable from October 3.
Any SME scrip, if its price moves +or-25 per cent in five trading days, or a few clients dominate trading in that particular scrip, it will come under short-term ASM.
“Market participants may note that the TFT framework will be in conjunction with all other prevailing surveillance measures imposed by the exchanges from time to time. Further, the shortlisting of securities under TFT is purely on account of market surveillance, and it should not be construed as an adverse action against the concerned company/ entity,” the circular said.
The applicable rate of margin is 50 per cent or existing total margins, whichever is higher, for short-term ASM stocks.
Intra-day trades are not allowed in the T2T segment, as all buy and sell transactions will be compulsorily delivered.
What impact will it have on the stocks and exchanges?
Some of the SME stocks are trading at over 50 times their price-to-earnings multiple, which is not sustainable. However, some investors, hoping to make a quick buck, are lapping them up without understanding the valuation mine-field.
These measures will help bring some stability to the price movement of these stocks and protect gullible investors from pump-and-dump players.
Retail investors should remain cautious as they may get stuck with the stocks due to lack of liquidity. If corporates, exchanges and investors remain vigilant, it will benefit everyone in the value chain, and help the exchanges in achieving their primary goal of inclusive growth.