In your interest.
Online Personal Finance Magazine
No beating about the bush.
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
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.
Activities in the Indian IPO space have a fair share of greedy promoters and underhand dealings. Issues continue to be priced irrationally, partly because of a misplaced perception of future performance and investor interest, and partly to feed the egos of power-hungry promoters. Adding to this, the nexus between company promoters and merchant bankers to the issue makes the picture even murkier. In such a scenario, who would blame the retail investor for not taking interest in the primary markets?
Retail investor response to recent IPOs has been tepid at best. These issues have been subscribed fully only through ‘discount deals’ with large institutional investors and merchant bankers, who demand a hefty discount of 30%-50% in order to help close the issue and soothe frayed nerves of panic-stricken promoters. This is one of the primary reasons explaining the mystery of IPOs listing at substantial discounts to the issue price. This may be just the tip of the iceberg, though, as other worrying trends are surfacing within the IPO arena. There are instances of promoters doling out cash to arm-twisting merchant bankers seeking upfront rewards for closing out under-subscribed issues. Other reports indicate merchant bankers applying in huge volumes to IPOs where investor response is muted, keeping promoters at their mercy till the last date of the book closure.
Of the 16 IPOs that have come up so far in 2009, only six are trading above the issue price. Others have plunged steeply against the issue price. Den Networks, which listed on 24 November, closed at a discount of 16.36% to the issue price of Rs195. It is currently trading at nearly 20% below offer price. Although the offer was oversubscribed 1.04 times, retail portion was subscribed only 0.0963 times. Investor interest was also muted in the offers by Oil India, Raj Oil Mills and Globus Spirits. Others are struggling to provide positive returns despite being oversubscribed. Euro Multivision and Rishabhdev Technocable are currently trading roughly 61% and 47% respectively below their issue prices. Indiabulls Power, which attracted huge attention even from retail investors, is down 27% over its issue price. Globus Spirits, Adani Power and NHPC also suffer from the same fate.
This IPO debacle has not gone unnoticed at various equity research firms, where some analysts are, for once, sounding off investors against putting money in IPOs of companies lacking enough credibility. Even companies with strong fundamentals are being scrutinised in greater depth. IPO price bands of Adani Power, Oil India and Raj Oil Mills were considered steep by some brokerage firms despite healthy prospects. Pipavav Shipyard IPO was actually assigned an ‘avoid’ rating in one of the research reports.
Amidst all this, the government is drawing up blueprints for follow-on issues for PSUs. However, before the government decides to immerse its feet in choppy waters, it should have a closer look at the goings-on to avoid being taken for a ride by the investment banking community.