Exchanges would prefer companies with a sizable fund requirement to start with, say market players.
The Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE) are ready to launch trading in the small and medium enterprises (SME) segment and a formal announcement is round the corner, according to officials. However, market players believe key issues regarding market-making and other costs are yet to be addressed.
The Securities and Exchange Board of India (Sebi) had set a three-year market-making criterion for SMEs planning a listing, which would ensure adequate liquidity and exit for investors. Mostly, the market makers are required to provide two-way quotes. But, stock exchanges, which act as facilitators to companies by putting these in touch with the merchant bankers, are unable to provide specific cost details with regard to market-making and other expenses.
In the first three years, there will be a market maker for a public issue, who will support the sustenance of the public offer by providing a two-way quote. Practically, he will hold a certain number of shares of a particular SME and facilitate trading in that security. After a buy order is received, he will immediately sell from its own inventory or seek an offsetting order. This process will facilitate transactions in SME securities and provide liquidity to the securities. However, for SMEs, this will not come free of cost. A fee will be charged by the market makers, increasing the cost of raising equity.
“We have submitted details of at least three companies with a exchange. But, since the IPOs of these companies are as small as Rs 50,00,000-Rs 100,00,000, exchange officials are not giving details about the various costs involved,” said a consultant.
The consultant believes both exchanges have their particular sets of investment bankers and they guide accordingly, when approached. Unlike IPOs of larger companies, Sebi has put the onus of clearing IPOs of SMEs on the exchanges. Small companies directly come in contact with BSE and NSE when they conduct awareness programmes in various towns and cities.
“While one exchange says the entire expense of an issue could be around 8-10 per cent of the entire money raised, the other gives some different calculations. Also, in many cases, the exchanges are initially not willing to look at companies having a very small fund requirement. They want companies which want to raise at least Rs 5 crore, so that cost and other issues can be worked out,” said a Mumbai-based merchant banker.
Also, there are other fees relating to underwriting and sub-underwriting of the issue. An investment banker will underwrite 15 per cent of the issue using his own resource and can bring external investors to underwrite the remaining 85 per cent of the issue. This is another area of concern.
According to NSE officials, the cost could depend on how merchant bankers want to charge their clients. Still, they are planning to address the issue of market-making by introducing a ‘call auction mechanism.’ Under this, the NSE would not stipulate continuous trading sessions for the entire day, but for a few minutes on regular intervals.
“Call auction could bring down the cost of market making. It is like the pre-opening session of the main market. We are creating a proper ecosystem to address cost issues,” said an NSE official.
Most exchange officials say they would like to start with companies which look are promising and show growth potential, which is why they would not back companies which are too small. "Initially, our target is to allow companies, which want to raise around Rs 5 crore so that cost issues can be addressed, said a BSE official, "However, while a launch can be announced, it would take time for any IPO to come."
As per Sebi, SMEs are allowed to raise as less as Rs 5 lakh and up to Rs 5 crore. Any company whose post-issue capital has a face value of between Rs 50 lakh and Rs 10 crore can list on the SME Exchange. Companies with post-issue capital exceeding Rs 10 crore but less than Rs 25 crore can choose to list on either the SME Exchange or the main exchange. Companies with capital of over Rs 25 crore will have to list on the main board.
"Both NSE and BSE are banking on the fact that many venture capitalists and foreign funds have shown interest in Indian SMEs and hence they will be keen to invest in these SMEs through exchange," said Vivek Sharma, Domain Expert - Financial Services Dun and Bradstreet, in a note.
In the current global scenario which has seen massive flight of capital from emerging economies, this is an unfair assumption in short run. From stock exchange perspective also SME exchange seems to be a long term proposition. It will take around 5 years for an exchange to break even.
Meanwhile, an alternate platform for SMEs to raise fund ahead of listing is emerging in the form of India Venture Board. It is supported by many venture funds .
"Behind IVB is the belief that there is a need for significant increase in the flow of venture capital and early stage investments in India. This is not only critical for the country but also for the overall equity ecosystem; a surge of innovation based high growth enterprises will provide feeder stock to bigger Venture Capital and Private Equity (VC/PE) funds and finally to the public markets," says the website of IVB, which also carries logo of NSE and SIDBI.
