BSE, NSE gear up to launch SME trading

In a major financial move, Bombay Stock Exchange (BSE) and National Stock Exchange (NSE) are gearing up to begin trading in the small and medium enterprises (SME) sector. A formal announcement is yet awaited, even as, market players stress that the key problems related to market-making and other costs are yet to be ascertained.

The First Steps

Previously, the Securities and Exchange Board of India (SEBI) had prepared a three-year criterion on market-making for SMEs which were planning a listing. This step was to ensure optimum liquidity and options for investors to exit. Generally, market makers are expected to forward two-way quotes. But, stock exchanges, which operate as facilitators to companies by linking them with merchant bankers, have failed to reveal specific details of costs related to market-making and other expenses.

In this system, in the first three years, there would be a market maker for a public issue who will be responsible for supporting sustenance of the offer by allocating a two-way quote. He will practically hold a certain number of shares of a particular SME and will assist trading in that security. When a buy order is received, he would immediately sell from his own share or seek an offsetting order. The process will support transactions in SME securities and also provide liquidity to them. SMEs would be expected to pay a certain fee to the market makers, which would contribute to cost of raising equity.

Way the Exchange Works

While one of the exchanges puts the entire expense of an issue around 8-10 per cent of the entire money raised, the other offers varied calculations. The exchanges are unwilling to look at companies with small fund requirements and want companies which want to raise at least 5 crores. Exchanges are expected to start with promising companies with ample growth potential. 

 

SEBI mentions that SMEs are allowed to raise amount as less as Rs 5 lakh and up to Rs 5 crore. Any enterprise whose post-issue capital has a face value of between Rs 50 lakh and Rs 10 crore can be included on the SME Exchange. Businesses with post-issue capital ranging between Rs 10 crore and Rs 25 crore can choose to be on the SME Exchange or the main exchange. A capital of over Rs 25 crore makes the companies eligible for the main board.

There are other fees for underwriting and sub-underwriting of a particular issue. Another point of concern is the fact that an investment banker will underwrite 15 per cent of the issue using his own resource and can include external investors for the remaining 85 per cent.

Calculating the Cost of an Issue

NSE officials estimate the cost of a particular issue as per the cost quoted by merchant bankers to their clients. They are planning to introduce a ‘call auction mechanism’ which would allow them to break the continuous trading sessions spanning the entire day into sessions of few minutes held on regular intervals. This is expected to bring down the market making cost and create a proper system to address cost issues.

SMEs are also expected to gain with the onset of many venture capitalists and foreign funds and the emergence of the India Venture Board which is proving to be a viable platform for SMEs.