SME platform: Little to float on :Business Line,

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The next big development that is likely in capital markets is the launch of the Small and Medium Enterprises (SME) platform by both the BSE and the NSE.

Both the exchanges are awaiting the final regulatory nod and have begun wooing companies to list/migrate to the new platform.

It is obvious that the Government is the driving force behind this move. The reason is not far to seek. As the new BSE-SME Web site states, micro, small and medium enterprises contribute 8 per cent to India's GDP, account for 45 per cent of the manufactured output and 40 per cent of the exports. They are also the largest generator of employment in the economy. Providing capital to these enterprises obviously features on top of the government's agenda. .

The regulations are in place, the infrastructure is ready and the exchanges are waiting for the green signal before they vroom ahead. But is it going to be a smooth road for the new platform?

THE RULES...

The regulation states that issues with paid-up capital of less than Rs 10 crore can list on the SME platform. Companies with post-issue capital between Rs 10 and 25 crore have the option of listing either on the SME platform or on the main exchange. Those with capital exceeding Rs 25 crore should list on the main exchange only.

There are certain relaxations given to companies on the SME platform to make the public issue process simpler. It is also stipulated that SEBI shall not issue any observation on the offer document. The onus is, however, on the merchant banker to ensure that the information in the offer document is accurate and not misleading.

These companies need to disclose only half-yearly financial results and do not have to send annual reports to every shareholder. That can instead be displayed on the company Web site.

The minimum application value in IPOs and minimum trading lot size is fixed at Rs 1 lakh and the minimum number of allottees in an issue is to be 50. The merchant bankers to the issue have to ensure that the issue is fully underwritten and they are required to subscribe to 15 per cent of the issue themselves. Apart from this, merchant bankers also need to ensure market making for the scrip for three years from the date of listing.

WHY SME EXCHANGE?

It is undeniable that small enterprises find it harder to raise capital when compared to their larger counterparts due to lower visibility, doubts about corporate governance and the difficulty investors in such ventures face while trying to divest their holding. Companies listed on a national stock exchange will be able to redress all these concerns.

The regulations have also given some leeway to these enterprises that will reduce the cost for making a public issue and reduce the operation costs.

WHITHER LIQUIDITY?

However, the main concern with the new platform is likely to be liquidity. In its zeal to protect small investors from fly-by-night companies, the regulation has set the market lot for public issue and trading on the exchange at Rs 1 lakh. This would ward-off smaller investors who typically trade and invest in smaller lots ranging from Rs 10,000 to Rs 25,000.

It can be argued that these companies are riskier bets and smaller investors need not get an exposure to them. But the choice should ideally be left to the investor.

Some of the smaller companies can be multi-baggers while a large-cap can wipe out a small investor's entire investment capital. Again, by laying down such a ceiling, the regulator seems to give a tacit acknowledgement that companies that are listed on this exchange are not safe. If it is so, then they should not be allowed to list on a national platform.

The minimum number of investors who will be allotted shares in a public issue is to be 50. Institutions and high net worth investors (HNIs) are assumed as the target investors on this exchange. But larger institutional investors typically stay off smaller companies where disclosures are inadequate or liquidity is meagre.

The regulator has tried to circumvent the liquidity issue by asking merchant bankers to ensure market making with the help of a listed member for three years from the date of listing. It is assumed that the stock would have gained visibility and liquidity will follow in three years. But that might not be so. The experiment with market makers in the OTCEI exchange too tells us that this model is not enough to ensure liquidity.

Both the NSE and the BSE are mulling using call options in limited windows during the trading session, when orders can be bunched up and executed. This move underlines the fact that exchanges are bracing to fight an uphill battle to maintain liquidity.

SME VERSUS MAIN BOARD

The regulation lays down that companies with post-issue capital less than Rs 10 need to list on the SME platform. But companies that list on this platform are at a disadvantage since the liquidity here is likely to be extremely thin, as discussed above. Lack of retail participation will also result in low visibility.

Companies might, therefore, prefer to increase their capital to more than Rs 10 crore and list on the main board instead of the SME platform, despite the higher compliance and public issue cost on the main board.

It is not clear what will be the fate of companies with paid-up capital of less than Rs 10 crore listed on the main board. If a choice is given to these companies to stay on the main board or migrate to the SME platform, not many may opt for the latter.

The intention is noble, but the method a trifle faulty. It will be interesting to see how investors take to the new SME platforms and how the exchanges ensure that this platform fulfils its objective of acting as a conduit for the much-needed capital to small and medium enterprises in the years ahead