Unlimited risk associated with market making needs to be addressed: Lakshman Gugulothu

Interview with CEO, BSE's SME Exchange

Merchant bankers are finding rules, such as market making of securities for a minimum of three years after listing on the Small and Medium Enterprises (SME) platform tough, says Lakshman Gugulothu, CEO of the SME Exchange at the Bombay Stock Exchange (BSE). He suggests that offer documents and listing agreement be further simplified and processes be automated. Edited excerpts from an interview with Mehul Shah:

With just one listing so far, the activity on the SME platform seems to be muted. When do you expect Max Alert Systems and Monarch Health Services, which have filed offer documents with your exchange, to list? How many more companies are expected to list in the next six months?
We are at various stages of discussions with companies desirous of listing their equity on the SME exchange. These two SMEs (Max Alert and Monarch Health) are likely to go public in the next two weeks. We are expecting to list 25 SMEs in the next six months. Our understanding is that many more companies are planning to join once the market situation improves.

The preparations for the SME Exchange started over nine months earlier. What are the reasons behind such a slow start?
There was a delay in getting approval from the Securities and Exchange Board of India (Sebi). We got it by the end of September 2011. Deepavali and audit up to September 2011 (half-yearly audit) completion consumed another couple of months. Due to Sebi’s ban on some merchant bankers, adverse market conditions and uncertainties, we lost a couple of more months.

The processing, RoC approvals, public issue and allotment of shares took a few more. Being the first issue (BCB Finance), a lot of clarifications were needed and this also consumed considerable time. However, we managed the issue within a reasonable timeframe.

Are merchant bankers finding rules like market making of securities for a minimum of three years after listing and 100 per cent underwriting of the issue tough?
Merchant bankers are finding it tough on both counts. Many are reluctant to bring initial public offerings (IPOs) on SME exchange. We need a different breed of merchant bankers, on a pan-India basis. The unlimited risk associated with market making needs to be addressed at the earliest. The risk has to be commensurate with the reward. It is difficult for market intermediaries who work on a fee-based model to take unlimited risk, as they are not investors.

What challenges are you facing in promoting the SME platform? Any suggestions to improve the mechanism?
The offer documents and listing agreement need to be further simplified. There is a need for the automation of processes, so that the IPO can be brought in the shortest time and a large number of them can be handled with the same resources. Qualified Institutional Buyers and PE/VCs are reluctant to work as “nominated investors”. There is a need to consider other entities in this regard.

What is BSE doing to draw more companies towards its SME platform?
BSE has undertaken an awareness campaign through television, print, direct participation in seminars and meeting industry representatives, etc. This has been done on our own, as well as in partnership with various government agencies and industry bodies. We have covered many states and SME clusters in this regard. Based on our interactions at various levels, we believe industry participants have recognised a need for listing on the SME exchange. Many of them are preparing documents and getting their organisations ready for the rigours of listing.

BSE is sensitising investors to align the different investor classes with the SME exchange. We are clearing apprehensions of market intermediaries and facilitating their participation. Policy support for “crowding in” of investments is essential. We are working with the regulators to evolve a workable and practical model of the SME exchange.