Stock Market for Small Businesses
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The trend of stock markets for small businesses in India has been initiated by the Bombay Stock Exchange (BSE), which is among the oldest of its kind in the continent. It has started operations with the inclusion of BCB Finance Limited, which is based in Mumbai. In the meantime, Emerge, the stock exchange platform for the small and medium enterprises of the National Stock Exchange of India (NSE), has started its operations as well.
Both the stock exchanges were opened after discussion with the following entities:
- Small organizations
- Industry representatives
- Merchant bankers
- Securities and Exchange Board of India (SEBI)
It was during May 2011 the capital markets regulator of India had provided its approval to both the exchanges and this was done in principle. The stocks of BCB Finance have performed well. Its initial public offering was worth INR 8.8 crores.
Latest Developments in NSE and BSE SME Stock Exchanges
Madhu Kannan, the managing director and chief executive officer of the BSE, has stated that several SMEs have provided their prospectus. They have been discussing with several other companies and it can be expected that in the present year 12 companies will be enrolling in the exchange. A member of the SEBI, Rajeev Agarwal, has revealed that now the SMEs will have greater help when it comes to maximizing their growth potential now that the stock exchanges have been introduced.
Thejo Engineering Ltd has recently provided a draft prospectus to the National Stock Exchange. The company is looking to create almost INR 20 crores and in the next few quarters it expects that there will be close to 10 listings. However, the business will only happen on the basis of market conditions in these next quarters.
Rules and Regulations of NSE and BSE SME Stock Exchanges
The new exchanges have come up with relaxed rules so that the small and medium enterprises can be helped properly as these companies find it pretty tough to get either investors or funds.
One example of the relaxed norms is that these smaller companies need to furnish financial results of the immediately previous 6 months only. They will also not be needed to submit annual reports. As of now, the retail investors may not be able to participate in these stock exchanges.
The lower level of requirement with regards to lot sizes for the initial public offerings as well as trading is INR 1 lakh. This amount has been deemed proper but only for the wealthy investors who are also aware of the way the cookie crumbles in the Indian financial scenario. In case of these exchanges, the SEBI will not take care of the IPO prospectus of a listed company – something that is different from the normal routine in case of share market transactions.
As per regulations, any organization with an initial public offering capital of lower than 10 crore rupees will be able to become a part of the trading platforms. According to the guidelines laid down by the SEBI once these companies cross the 25 crore mark with regards to IPO capital they will be able to trade on the major stock exchanges as well – this will enhance their business prospects substantially in the future.
The rules state that merchant bankers who are responsible for management of the small and medium enterprises will now need to appoint brokers who will be working as market makers as well as underwrite the new stocks. This arrangement will be applicable for a 3 year period from the date when the shares are listed. In case of a minimum of 75 percent of these deals, the market makers will be providing two way bids.
What are Market Makers?
The market makers are primarily brokers who assume risks through ownership of many shares at the same time. This means trading can be done in lieu of compensation. The Securities Exchange Board of India has stated that venture funds will be given permission to get finance for their profit making operations. This will be performed by nominated investors, which is a specialized category in itself.
History of NSE and BSE SME Stock Exchanges
SEBI had already been in consultation with the national level exchanges before it started a structure for the share markets so that they could come up with a specialized platform in 2008 for the small and medium enterprises. It gave more details regarding the guidelines during 2010. In February the regulatory organization determined the rules for the minimum lot sizes – here the minimum mark was determined at INR 1 lakh.
Differences between NSE and BSE SME Stock Exchanges
There are some differences between the stock exchanges created by the NSE and BSE – the framework of NSE is very much its own with several rules and regulations for trading but the BSE has agreed to the guidelines of the Securities and Exchange Board of India. As an example, in case of NSE there will be gradation for the small and medium companies’ initial public offerings – this has not been mentioned in the guidelines of the national regulator of securities.
The National Stock Exchange will also be doing research on an independent basis on the companies that have been listed on its website. This will be done once the listing is done – a lot of focus will be on the way the companies use their financial resources.
Yet another important area of difference between the two stock exchanges – the NSE has opted to provide the companies that are listed with it two choices. They can pick any one from call auction and continued trading. This will assist with the allotment of the shares and in determining the overall prices.
With call auction, investors give orders for selling and purchasing the shares – these are then matched in order to determine a price, which will be ideal for generating the highest possible number of trades.
Future of NSE and BSE SME Stock Exchanges
Economic experts are of the opinion that for the stock exchanges for the small and medium enterprises to thrive it is essential that the money markets should change the way they operate. In the past, all the attempts to initiate such set-ups have not been successful.
History of NSE and BSE SME Stock Exchanges
One example of such a structure was the OTC Exchange of India. Started during 1990, this was created to resemble the over the counter markets operational in the US. It could not get more than 100 listings and now has ceased to exist.
Functioning of NSE and BSE SME Stock Exchanges
Hari K who is heading the process of listings at the National Stock Exchange has stated that as of now the stock exchange will be focusing on call auctions.
The decision has been taken on the basis of the feedback they got from the companies. As a start, the call auctions will take place every hour. This type of auction can be considered well enough for the smaller shares because of the nature of their liquidity for most part of a trading day.
BCB Finance, one of the companies that performed well enough, has been able to get the traders’ interest but that happened at the start and the end of the trading duration.
Possible Issues for NSE and BSE SME Stock Exchanges
Nipun Mehta who has been an SA Dave Committee member and is a private banker for Societe General, has revealed that liquidity will be a major issue for the trading platforms for the small and medium companies. Incidentally the SA Dave Committee was created during 1995 by the SEBI to handle the reformation of the OTCEI.
Mehta feels that with the minimum lot size of INR 1 lakh there will be many investors – the number could also run into 100 – but there could be no business on some days as well and this will act as a major impediment. Mehta also feels that the exchanges will be more benefited if call auction is performed for an hour with greater amount of orders and lower spreads.
In case the markets are either flat or bearish the market makers could have to deal with some significant problems like lot of inventory, substantial holding costs, and, the most important of them all, huge losses. Financial experts have also warned that the regular exchanges should not be redesigned to suit the smaller companies and too much emphasis must not be given on market making.
The chairman and managing director of Prime Database which operates as a tracker of primary markets, Prithvi Haldea, has emphasized that it is important to have substantial liquidity in a market where there are no retail investors and where the economically affluent investors are operating as mini venture funds.
How will NSE and BSE SME Stock Exchanges Help Small and Medium Companies
It is expected that NSE Emerge, introduced on March 13, 2012 as an online version, is going to help investors put their money in developmental companies. Ravi Narain, the managing director of NSE, states that it is capable of vastly improvements with regards to risk capital access for the emerging economies.
Emerge will be providing its listed SMEs with several important services such as:
- Post listing search reports
- Preparation of issues
- Handholding of issues
Narain is optimistic that with the dual option of call auction and continued trading will enable the investors focus their energies in the proper direction. He expects that by September 2012 Emerge will have approximately 9-10 listed organizations.
Kannan feels that with the introduction of the BSE SME Exchange companies will now be able to get access to other means of equity capital generation and achieving greater rates of growth. This platform will also aid in the early identification of good SMEs that are sure to be profitable deals. He has expressed hope that the exchange will be able to enlist 10 organizations by the end of the 2012-13 financial year and almost 100 in the coming 18 months.
At present the SMEs in India are facing several critical challenges such as the following:
- Globalization
- Higher expenses of funds
- IT upgradation
- Infrastructure related problems
RK Mathur the MSME (micro, small and medium enterprises) secretary has stated that the smaller organizations also have great potential for listing. Lakshman Gugulothu, the chief executive of the BSE SME Exchange has stated that so far the smaller companies have been aware only of the options for debt financing and their awareness levels about funding avenues such as share markets and equity capitals are not that high. The two stock exchanges can prove to be of great help in this regard.
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Last Updated on 5/4/2012
