SEBI discussion paper on bourse for small, medium enterprises

[K.Karthik Raja]

SEBI discussion paper on bourse for small, medium enterprises
Monday, May 26

MUMBAI - Securities and Exchange Board of India today issued a
discussion
paper for a proposed stock exchange for small and medium enterprises.
"There is a felt need for developing a dedicated stock exchange
for the
SME sector so that SMEs can access capital markets easily, quickly and
at
lower costs," the capital market regulator said in the discussion
paper.
"We want to be cautious as previous plans to set up SME exchanges
have
failed", C.B. Bhave, chairman of SEBI, had recently said, while
referring to
the norm to be formulated for such an exchange.
SEBI has invited comments and suggestions on the discussion paper
by Jun 6.
Following is the full text of the discussion paper available on
SEBI Web
site:
.
Discussion paper on developing a market for Small and Medium
Enterprises in
India
.
1. Background
.
The Small and Medium Enterprises (SMEs) play a catalytic role in
the
development process of most economies as they constitute a major part
of the
industrial activity in these economies. This is reflected in the form
of
their increasing number and rising proportion in the overall product
manufacturing, employment, technical innovations and promotion of
entrepreneurial skills. The contribution of SMEs in the development of
Indian
economy has been significant, both in terms of contribution to GDP and
creation of employment opportunities. They contribute around 20% of
GDP and
are the largest generator of employment (approximately 25 million). In
India,
SME sector is the second largest employer, after agriculture. With the
Indian
economy growing at more than 9 per cent and size of the economy
crossing the
$1 trillion mark, the need of SMEs to raise capital is becoming
increasingly
critical.
.
2. Industry Concerns
.
Discussions were held with various market participants and industry
representatives to seek their comments / suggestions on the subject.
During
the course of the discussions, certain areas of concern on the subject
were
expressed by them, which are as under -
+ The cost of raising capital for SMEs is quite high.
+ The current means of financing for SMEs are not adequate as they
do not
have easy access to funds from Angel Investors, VCs and PE players.
+ Most costs of compliance in raising capital under the existing
guidelines are fixed. As a result, the costs become burdensome for
smaller
issues (SMEs).
+ The SMEs should be provided a framework that would enable them
to raise
capital quickly and at a low cost.
+ Owing to small size and less affordability, the eligibility
conditions,
listing requirements, corporate governance norms and disclosure
standards may
need to be suitably relaxed for SMEs.
.
3. Need for a separate dedicated SME stock exchange
.
In view of the aforesaid concerns raised by the market
participants /
industry representatives, there is a felt need for developing a
dedicated
stock exchange or the SME sector so that SMEs can access capital
markets
easily, quickly and at lower costs. Such dedicated SME exchange is
expected
to provide better, focused and cost effective service to the SME
sector. The
need for having a separate exchange / platform for SMEs was also
discussed
during the 32nd Annual Conference of IOSCO held in April 2007 in
Mumbai and
it was felt that the same would be necessary for the focused
development of
the SME sector.
Efforts had already been made in the past for catering to the
needs of small
companies. Towards this end, OTCEI was set up in 1989 and the INDO
NEXT
Platform of the BSE was launched in 2005. However, both these
experiments
failed to achieve the desired results.
.
4. International experience
.
Internationally also countries have provided for a separate
exchange /
trading
platform to facilitate listing of securities of growth companies / new
economy companies / small and medium companies. Some of the cases in
point
are the Alternative Investment Market (AIM), London, the Growth
Enterprises Market (GEM), Hong Kong and MOTHERS, JAPAN. Out of these,
the GEM
is a separate dedicated stock exchange whereas the AIM and the MOTHERS
are
trading platforms of their respective main stock exchanges. AIM
provides for
ease of entry and less onerous disclosure requirements but appropriate
level
of regulation for smaller companies. It also provides faster admission
process and no pre-vetting by regulator. GEM operates on the
philosophy of
"buyers beware" and "let the market decide" based on a strong
disclosure
regime. Here the rules and requirements are designed to foster a
culture of
self compliance by the listed issuers in the discharge of their
responsibilities.
In the case of MOTHERS, the emerging companies applying there must
have the
potential for high growth though there are no specific numerical
criteria for
determining growth potential. Further, the applicant company is
mandated to
make a public offering of at least 500 trading units. At the time of
listing,
it should have at least 2,000 trading units and the market
capitalization of
its listed shares should be more than 1 Billion Yen. The applicant
must also
have a continuous business record of not less than 1 year dating back
from
the day on which it makes listing application.
.
5. Issues for consideration
In view of the aforesaid concerns raised by the industry
representatives
/ market participants, it may be necessary to have a fresh look on the
listing norms and continuous disclosure requirements for the SME
sector.
Accordingly, SEBI is in
the process of framing a suitable policy with regard to the above. In
this
regard,
public comments are sought on certain important issues, mentioned
below:
Issues relevant to the Primary Markets
a) In order to have only informed, financially sound and well-
researched
investors, it may be desirable to fix a minimum investment size, say
Rs. 5
lakhs, at the time of the IPO.
b) To facilitate retail participation in SMEs for investors having
high-risk appetite, specific allocation through mutual funds may be
permitted.
c) For being eligible to participate in the SME exchange, a
company may
have a
maximum post-issue capital of Rs. 25 Crores.
d) Specialized Merchant Bankers may be licensed for exclusively
catering
to the needs of the SME segment.
e) There may not be any requirement of vetting of the offer
document by SEBI
since the intended investors are expected to make informed and
calculated
investments.
f) As per the existing DIP Guidelines, the issuer company is
required to
have net tangible assets of at least Rs. 3 Crores in each of the
preceding 3
full years, a track record of distributable profits for at least 3 out
of
immediately
preceding 5 years and a net worth of at least Rs. 1 Crore in each of
the
preceding 3 years. These may be relaxed completely for SMEs.
g) There may not be any restriction on the number of investors as
long as
they
are informed investors.
h) Price discovery may be made through fixed price mechanism or
through the
book building process.
i) Underwriting may be made mandatory and it may be also mandated
that the
merchant bankers for the IPO, be required to compulsorily fully
underwrite the
issue.
j) The merchant bankers/underwriters in the IPO may be
compulsorily required
to be market makers for the company.
k) The issue should be through electronic applications only,
eliminating
all costs associated with paper printing and processing.
.
Issues relevant to the Secondary Markets
a) In order to ensure that the relaxed criterion for SMEs does not
result
in retail investors being drawn in, a minimum trading lot of Rs. 5
lakhs to
be prescribed.
b) Trading system may either be order driven or quote driven. In
this
regard, the settlement may either be on rolling, trade for trade or
call
auction basis.
Flexibility may be given to the exchange concerned.
.
Continuous Listing Requirements
a) Reporting of results by the companies listed on the SME
exchange may
be made on a half yearly basis instead of quarterly basis. Further,
they may
be
required to file only unaudited results.
b) A simplified and abridged version of the annual report may be
prepared by
the company and the requirement of sending full annual reports to all
the
shareholders may be dispensed with. Instead, the companies may post
their
annual reports on their web-sites or of the exchange. Physical copies
of the
same may be provided to the shareholders only on specific request.
c) The companies listed on the SME exchange may migrate to the
bigger
exchanges as and when they meet the listing requirements of the bigger
exchanges. End
.