BSE SME exchange has sought clarification on certain regulatory and operational aspects from the market regulator SEBI ahead of its forthcoming launch. Mr Lakshman Gugulothu, CEO, BSE SME exchange, told Business Line that clarity was required on definition and role of sub-underwriters in an IPO of a small or medium enterprise eligible for listing on the exchange.

“There are small gaps in perception or operationalisation of the broad concepts. They need to be plugged,” he added. The BSE team would meet SEBI officials on Monday to sort out the issues as also seek early approval for the proposed exchange.

According to the SEBI guideline for an SME exchange, the merchant banker and his team of sub-underwriters need to give 100 per cent underwriting to an SME IPO. Merchant banker will underwrite 15 per cent in his own book of accounts and sub-underwriters were to get the fee for sub-underwriting, the regulator said. However, who can be the sub-underwriter is not clear from the guidelines.

Certain nominated investors may be permitted to enter into contractual arrangements with the merchant bankers to share the burden of devolvement of underwriting obligations; however such contractual arrangements shall be subject to the prior approval of the SME Exchange.

Market insiders said as of now the QIBs and P/E firms were not keen to be the nominated investors. However, SEBI assumed a key role of these players after an SME listing through buy or sell of shares from market makers.

SEBI also did not make provision for a share borrowing and lending mechanism in its guideline. SEBI said the market makers would be allotted 5 per cent of inventory for market making at the time of IPO.

But it is not clear how a shortfall in this inventory can be made up if during the course of trading it occurs or if the market maker exhausts the inventory.

Though promoter holding is compulsorily locked for the first year after an IPO, only 20 per cent of the shares were allowed to be locked for the next two years by the SEBI. If the promoter dumps the shares after the first year, the market maker then could be in a difficult spot. “The market makers needed to be systemically guarded against such a situation”, said the head of a big brokerage.

SEBI, which perceived the exchange as the principal regulator, did not make provisions in its guideline for “exception” handling. “SME stock market is an uncharted territory and the risk of merchant banking and market making is significant. Both the players should have exit options in certain circumstances,” a senior stock exchange official said.

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