Viability of SEBI’s proposed SME platform remains a concern

SEBI has allowed exchanges to set up independent SME exchange platforms, but doubts persist over how far it will succeed at creating a thriving market in SMEs

Market regulator Securities and Exchange Board of India (SEBI) has made a lot of sound and dance about its proposed exchange platform for small and medium enterprises (SMEs). It has announced a list of norms for the new platform, which leave several questions unanswered. For instance, will the new platform be successful at attracting SMEs? Would it create a thriving public market in SMEs allowing them to raise capital? And why have previous experiments such as IndoNext (on the BSE) failed?

Previous attempts at creating a similar platform were fraught with issues relating to liquidity and inadequate participation due to lack of awareness. Jagannatham Thunuguntla, equity head, SMC Capitals says, “The main challenge with creating an SME platform anywhere in the world is that of ‘illiquidity of the trading scrips’ and lack of sufficient trading volumes of the stocks trading on these platforms. Hence, once the trading volumes of these stocks dry up, these stocks gradually lose interest from investor circles.”

One of SEBI’s norms specifies that merchant bankers to the issue will bear responsibility for market making for a minimum period of three years. It remains to be seen whether merchant bankers will be willing to stay around for three years. Mr Thunuguntla adds, “This time SEBI has introduced the concept of ‘mandatory market making’ for three years by the merchant bankers of all the SME IPOs that get listed on these platforms. One may need to wait and see how this market making works out in ensuring good trading volumes. Once market participants get familiar about these new developments, gradually action may pick up on these platforms.”

Madhabi Puri Buch, managing director and chief executive of ICICI Securities explains, “While the responsibility on the merchant bankers will be considerable, this will have the effect of ensuring that only those issues in which the merchant bankers have full confidence are brought to the public on this platform. The guideline envisages that the merchant bankers can tie up with a registered private equity entity in order to facilitate market making and this will assist them in ensuring that risks are better managed.”

SEBI was previously looking at creating a separate SME exchange altogether, but instead settled on a separate SME platform in the existing stock exchanges. Mr Thunuguntla feels that this is a good idea, as the existing stock exchanges already have tried-and-tested technology platforms and strong clearing mechanisms. If another SME exchange is to be created, then creating technology and clearing mechanisms all over again may prove to be challenging.
Sanket Dhanorkar [email protected]

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    Orders that SEBI suppressed

    What were the DSQ Software and Rajnarayan case all about? Sucheta Dalal looks at the two surprise orders revealed by the SEBI board.

    For over a year now, the media has been writing about how the Securities and Exchange Board of India (SEBI) has suppressed an order of a two-member bench, comprising Dr Mohan Gopal (who heads the National Judicial Academy) and V Leeladhar (former deputy governor of the Reserve Bank of India). Finally, on 9th November, when SEBI released the order, it turned out that there were in fact three orders—only one was related to the IPO scam, the other two date back to 2003 and thereabouts. The other two were in connection with National Securities Depository Ltd’s (NSDL) role in the DSQ Software case and that of Rajnarayan Capital Market Services Ltd (RCMSL) which was a depository participant (DP).

    The DSQ Software order was declared null and void by SEBI's board because it has allegedly criticised the regulator too. The one against Rajnarayan was ordered to be served on the parties, including NSDL. What were these two cases all about? The media seems to have buried them, although the DSQ Software scam made news for years and its owner, Dinesh Dalmia, has been languishing for over three years in a Chennai Jail.

    The DSQ Software case and the Rajnarayan case have remained hidden from the media for almost six years. If the SEBI board finally released these orders, it is only because of a public interest litigation filed in the Andhra Pradesh High Court. Here is what they say.

    The Rajnarayan case: The case pertaining to RCMSL dates back to 2003 when NSDL renewed registration to the firm although it did not meet the networth criteria. NSDL then took 30 months to terminate the firm as a depository participant (DP) and, during this time, it failed to prevent unauthorised transfer of securities of beneficial owners from the DP account to a pool account. It did not even deactivate the Depository Pool Module terminal for one-and-a-half years after termination.

    Meanwhile, a director of RCMSL had quietly opened a beneficiary account in his own name and transferred client shares to that account. Instead of taking action against the DP under its own rules and byelaws, NSDL kept writing to SEBI to initiate action. The Gopal-Leeladhar order finds a lack of urgency on the part of NSDL in dealing with the problem; it says that unauthorised transfer of securities from the account of beneficial owners and delay in detecting and correcting such transfers constitutes a failure to protect investor interest. It has directed NSDL to conduct an independent assessment of its systems and procedures and initiate remedial measures to ensure there is no repeat of this lapse. While the order has finally been served, the reason for SEBI's excruciating slowness in dealing with the issue and how it was kept out of the public domain is a big mystery.

    DSQ Software:  The findings of the Gopal-Leeladhar bench in the DSQ Software fraud are extremely interesting. It has examined in detail the charges made by SEBI as well as NSDL's explanation of its role. In this case, NSDL had rushed to dematerialise 1.3 crore shares allotted on preferential basis to four entities, without verifying if they had obtained listing permission, and allowed them to be delivered in settlement. As it turned out, the preferential allotment was a big scam and Mr Dalmia had even doubled his capital without bothering to inform the stock exchanges. NSDL too did not verify facts.

    How did NSDL believe whatever was claimed by DSQ Software regarding its preferential offer without verification? In fact, it even dematerialised 30 lakh shares issued as employee stock options and failed to ensure even the one-year lock-in mandated by the regulator. NSDL's argument that it is a mere record-keeping agency and not bound to exercise due diligence is rather flimsy. The Gopal-Leeladhar bench has correctly refused to accept this. It points out that NSDL's "erroneous and excessively narrow view" that it is a mere operator of the depository system is incorrect. It asks NSDL to conduct an internal inquiry and fix individual responsibility for failure to put in place appropriate systems to ensure that securities not approved for listing are not delivered in settlement.

    The bench also questioned SEBI’s failure to regulate NSDL effectively. In fact, those of us who have been following the capital market very closely, think that SEBI has been at pains to ensure that nothing about DSQ Software or the Rajnarayan case was ever allowed to leak into the public domain—there have only been occasional and vague reports about NSDL having even been questioned in that case. Isn't it ironical that SEBI has again buried this issue by declaring it null and void on the frivolous plea that the bench went beyond its terms of reference in criticising the regulator? According to the SEBI press release on 9th November, the full SEBI board will look at issues pertaining to the IPO scam and DSQ Software and dispose them. Well, we will wait and watch if the full SEBI board dares to punish NSDL after having worked overtime to shield it and its former chairman, CB Bhave.

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    HDIL not to increase property prices as commodity cost falls

    HDIL is planning to pass the benefit of low commodity prices to consumers by not hiking the prices of its properties

    Housing Development and Infrastructure Ltd (HDIL) has said that it will not increase property prices following the decline in commodity prices such as steel and cement and would pass on this benefit to its customers.

    "Cement and steel prices have come down substantially over the past few weeks and we will definitely pass on the benefit to the buyers and as of now, we are not going to increase the prices of properties. But if commodity prices increase again, then we may need to re-look at our strategy," said Sarang Wadhawan, managing director, HDIL.

    HDIL has a total developable area of about 196 million square feet (msf), out of which 70 msf is in the Mumbai Metropolitan Region (MMR), including the Mumbai International Airport Ltd (MIAL) project. HDIL’s ongoing projects account for around 64 msf while planned projects account for about 106 msf.
    "The response to new residential launches in Mumbai has been very strong, particularly in case of all the three projects launched by HDIL. As about 87% of HDIL’s land reserves are located in MMR, it is well-placed to benefit from the strong revival in the Mumbai property market," said Motilal Oswal Securities Ltd, in a report.

    During the quarter to end-September, HDIL made sales of about 1.5 msf from its ongoing residential projects in Kurla and Andheri and around 0.5 msf of its ongoing commercial project in Virar. The developer is trying to maintain the same percentage of sales in the third quarter (Q3 FY10) as it has reported in the first and second quarter.

    Emkay Global Financial Services Ltd, in a report said, "We are revising our NAV estimate for HDIL from Rs333 to Rs375 by increasing the transferable development rights (TDR) price assumption from Rs1600 per sq ft to Rs2100 per sq ft. We believe HDIL has strong cash flow visibility due to revival in the TDR market and new launches lined up in the residential space."
    - Pallabika Ganguly [email protected]

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