In the coming months, we may see two new stock exchanges, dedicated for the Small and Medium Enterprises (SME) sector — first from the Bombay Stock Exchange (BSE), to be quickly followed by the National Stock Exchange (NSE).

NEW SME LISTING NORMS

SME listing norms are less onerous to comply with, than those in the regular stock exchanges. Key concessions for SME listing, all aimed at reducing cost and time for SME IPOs, include Offer Document review only by the relevant Stock Exchange and not by Securities Exchange Board of India (SEBI), disclosure of half-yearly results instead of quarterly results, and no requirement for publishing results in newspapers.

KEY SUCCESS FACTORS

Valuable learning is available from the failure of regional stock exchanges and Over the Counter Exchange of India (OTCEI), as well as international experience such as Alternative Investment Market (AIM), a subsidiary of London Stock Exchange. Some of the key success factors include:

Strong Gatekeepers to the Exchange: SME exchanges should adopt stringent, analytically-determined entry criteria, not in terms of minimum net-worth, turnover or profitable record, but in terms of strength of the business model, growth prospects, sustainability of profit margins, quality of disclosure, profile of promoters, minimum initial public offering (IPO) grading, etc.

Preventing crooked promoters from accessing this market will be a crucial element of success for this exchange.

Create a credible investor base: SME Exchanges, in collaboration with SEBI, the Reserve Bank of India and some other institutions, should take significant efforts to build a good class of investors — Banks and insurance companies can be encouraged to allocate a small portion of their investment portfolio; institutions such as Small Industries Development Bank of India, National Small Industries Corporation and State Industrial Development Corporations can raise dedicated funds that can invest in SME IPOs; private banking firms and progressive investment firms can form angel funds that will invest exclusively in SME Exchange.

Spare the small investor: Investing in SMEs involves a higher degree of risk, given their position in the economic value chain, and vulnerability because of their size.

Create a supporting environment: Adequate, timely and continuous analytical coverage is a pre-requisite for maintaining investor interest in listed SMEs.

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