Remember something called Indonext? Even hardcore market players would take a few minutes to recall this market segment created as a separate platform in the Bombay Stock Exchange in 2005 for small and medium enterprises (SMEs) under a diktat from the then finance minister P Chidambaram. That attempt failed. Indonext, to which some ‘B’ group stocks were hastily shifted, did not attract new SMEs. The market regulator Securities and Exchange Board of India (SEBI) has now announced fresh plans for an SME exchange. It has permitted existing exchanges to set up a separate trading platform for SMEs, rather than have a dedicated SME exchange.

SEBI’s latest move is a product of over four years of deliberation to come up with an effective solution to help SMEs raise public equity. However, uncertainty still prevails over the final outcome of the new plan. Will it do better than Indonext which was a disaster, mired in liquidity and credibility issues, coupled with very little awareness among investors and institutions alike? The platform was launched in haste, not giving adequate consideration to various issues involved. It was linked more to the survival of the regional stock exchanges rather than creating an SME exchange. One earlier attempt, the Over-the-Counter Exchange of India (OTCEI) also turned out to be a failure, also plagued by issues such as liquidity, investor interest and technology.

SEBI recently released the norms for the SME trading platform, which have relaxed the criteria for SME listings. Companies will be exempted from the eligibility norms like track record on profitability as is applicable to other issuers. In order to have informed, financially sound and well-researched investors with a certain risk-taking ability, a minimum IPO application size of Rs1 lakh would be prescribed. An upper limit of Rs25 crore paid-up capital would be prescribed in order for a company to be listed on the SME platform and a minimum paid up capital of Rs10 crore would be prescribed for listing on the main boards of NSE and BSE. The merchant banker to the issue will bear the responsibility for market making for a minimum period of three years. The market regulator has also specified that during the compulsory market making period, promoters or acquirers will be allowed to dilute their shareholding only through offer for sale or to an acquirer and not to a market maker. SEBI has also allowed companies to go for pure auction of public issues instead of price band for institutional investors. Listed companies will be required to prepare and submit financial results on a half-yearly basis, instead of quarterly basis.

It is not clear whether these norms would bring about a thriving public market in SMEs allowing them to raise capital and provide returns to investors. The willingness of the market maker to be around for three years has not been tested. Whether investors, who have plenty of choices in the small-cap space, will jump into a new exchange is doubtful. Finally, it must be remembered that Indonext failed because it was a product of government diktat. In this case too, SEBI issued its order about SME exchange without much discussion.
–Sanket Dhanorkar