SME exchanges gain traction as more firms raise funds

SME Exchanges have come a long way since they were launched in 2012. The BSE was the first to launch its BSE-SME platform for small and medium enterprises and start-ups to list directly on the bourses and raise funds. The NSE launched its NSE Emerge almost immediately.

The first SME company to raise funds was BLB Finance in 2012 on the BSE-SME; since then about 330 companies have raised funds through the BSE-SME platform and over 200 firms on the NSE Emerge.

The BSE-SME and NSE Emerge were launched amidst fanfare to provide much-needed equity funding to SMEs, without the latter having to go through the stringent, time-consuming and expensive due diligence and compliances required for the main board IPOs.

According to SEBI, an issuer company whose post-issue paid-up capital is not more than ₹10 crore is eligible to list its securities on the SME exchange. The offer document is required to be submitted to the merchant banker, who in turn, will file it with SEBI. The latter will not scrutinise the offer document of an SME IPO.

In this fiscal so far, 15 companies have raised almost ₹100 crore through SME platforms on both the exchanges.

Why low trading interest?

Though more companies are now taking interest on the SME platform, trading interest is low in most of these counters post listing. Not all stocks are traded regularly on daily basis. For instance, of the 239 stocks available for trading, only 55 companies were traded on the BSE-SME platform on Friday. On the NSE, just 47 stocks were traded on Friday out of 136. The main reason for this low activity is the entry barrier for retail investors.

Due to fewer compliance norms, many of the SME companies are very small with annual sales of as low as ₹5-10 crore and annual profit of about ₹1 crore or so. The sustainability of such companies will always remain suspect, and hence, SEBI and exchanges want only high net worth ‘well-informed’ investors who can understand the risks involved in these companies to trade in these scrips.

Like in F&O, each stock will have a market lot in this segment. Hence, investors need to fork out at least ₹1 lakh.

However, according to the BSE, the SME-IPO index has produced an annualised return of 12.15 per cent over the five-year period.

Bet on migration?

Of the 329 companies that raised funds on the BSE-SME, 90 have migrated to the BSE main platform. On the NSE, stocks of 42 companies moved to the NSE trading platform. This is a healthy sign, as almost one-fourth of the listed stocks have migrated to the main board, indicating the willingness of the promoters to adopt to strict listing disclosure norms.

For migration, the market capitalisation should at least be ₹25 crore in the preceding 20 traded days from the date of submission of application to the exchange. A special resolution should also be passed in the AGM with at least two-thirds of the shareholders (apart from promoter shareholders) favouring the migration.

However, migrating to the main board does not guarantee a solid return. Veto Switchgears, the first company that moved to the main board in April 2015, is currently hovering around ₹41.65, against ₹78 where it was then trading. It, in fact, dipped to a low of ₹26.30 in March but recovered since then. Similarly, Zota Healthcare, which migrated to the main board last October when the share price was ruling at around ₹185, is currently ruling at ₹138.70.

Retail investors can stay away from SME stocks as the possibility of incurring losses is huge; they may also get stuck with the stocks due to lack of liquidity.