PE firms not keen to become 'nominated investors' for SMEs

Private equity (PE) and venture capital (VC) firms are not keen to become “nominated investors” for firms planning to list on the exchanges for small and medium enterprises (SMEs).

Market regulator Securities and Exchange Board of India (Sebi) has allowed qualified institutional buyers (QIBs) and PE/VCs to become nominated investors for companies planning to list on an SME exchange.

The nominated investor enters into an agreement with the merchant banker to subscribe to the issue in case of under-subscription or to receive or deliver the specified shares in the market making process.

Market makers infuse liquidity in a stock by providing both bid and ask quotes. According to Sebi norms, merchant bankers are required to ensure compulsory market making in the SME counter through the stock brokers of the exchange for a minimum period of three years from the date of listing.
 

NOT READY TO BE NOMINATED INVESTOR

• Sebi norms allow PE/VC firms to be nominated investors for SMEs
• Nominated investors subscribe to the issue in case of under subscription 
• Nominated investors also receive or deliver the specified shares in the market making process
• PE/VC firms say it's not their strategy to buy/sell stocks frequently

In case of firms listed on the SME exchange, market makers are allowed to buy from or sell to the nominated investors the required number of shares for market making. However, not many PE firms are willing to do this.

“PE & VC firms are essentially ‘pooled investments’, where the primary job of the general partner (GP) is that of a professional investment manager. The role of a nominated investor is to provide liquidity, a totally different paradigm within the overall market system of alternative exchanges,” said S M Sundaram, partner and chief financial officer at Baring Private Equity. “Unless generating returns to their investors explicitly includes such ‘market maker’ roles also as part of their investment management strategy, PE and VC funds may not just be uninterested in performing this role, but they may also not have the organisational capability to do that” he added.

Being a nominated investor for SMEs is not the investment thesis of PE/VC firms, experts say. “PE/VC firms don’t buy or sell shares on a daily basis. They don’t operate that way,” said Avinash Gupta, leader, financial advisory, Deloitte India.

“PE firms are long-term investors and have a four- to five-year commitment with the company,” he added. In a recent interview with Business Standard, Lakshman Gugulothu, chief executive officer of BSE SME Exchange, had said QIBs and PE/VCs were reluctant to work as “nominated investors” and there was a need to consider other entities in this regard.