SME Exchange: Need More Awareness

Today, India has more than 25 mn
SMEs and to an extent these SMEs has access to debt financing options
with minimal access to equity capital. In debt market, SMEs have 3
major options: bank loans, venture capital funding and angel
investors, but each has their own limitations. Banks are consistently
restricted in lending; in early stage, VC funding is also industry
specific and as Vcs are investing other's money, they try to take
the control of the company; and finding angel investors in itself is
a bigger problem. So, equity capital market may be the best possible
market to raise money as it reduces company's dependence on credit.

With a vision to provide equity
capital to these SMEs, a dedicated stock exchange-Over-The- ounter
Exchange of India (OTCEI) was set up. However, OTCEI was ahead of its
time and some of the modalities were new to the market and were not
conducive, and hence failed. However, as recommended by Prime
Minister's task force, a dedicated SME exchange learning from
OTCEI, capital market realities and seeing the problems of SMEs, an
SME exchange was formulated. Recently, Securities and Exchange Board
of India (SEBI) has given a nod to Bombay Stock Exchange (BSE) to
launch SME exchange providing a platform for SMEs to raise funds from
primary as well as debt market. This may be the best option for SMEs
to raise capital. There have been quite a few
successful SME exchanges like TSX V, Canada; AIM, London; GEM, Hong
Kong; NASDAQ, US, amongst others globally and a few listed smaller
companies to raise the capital for their expansion.

Eligibility for SMEs comes by having
paid up a capital in the range of Rs 50 lakh to 10 crore, after which
they would get a chance to get listed in the exchange. Another
important factor is that SMEs with paid up capital between Rs 10
crore to 25 crore can list the shares either on the main board or SME
exchange. To get started, the process of listing is made easy for
SMEs. At first, SEBI's approval is not required to get listed on
the exchange asit is to get listed for the main board. Financial
results are also to be submitted on half yearly basis rather than
quarterly basis. Also, SMEs can send their financial results directly
to the holders instead of full annual report going public. Secondly,
issues on this platform will be 100% underwritten and a support for 3
years will be provided in the secondary market through market making
activity.

According to Lakshman Gugulothu,
CEO, BSE SME Exchange, “The present SME exchange is diffe rent from
OCTEI in res pect of under writing of the issue and gua ran tee of
lis ting, simplification of the listing process, simpli fication of
the recur rent com plainces, leveraging of the equity platform,
leveraging the existing infrastructure of existing members of BSE,
and provision for migration to and from the main board.” The sectors
covered in SMEs would be
agro-based industries, manufacturing, textiles, constructions, and
IT. IT has shown immense growth opportunity in the past and so has
the IT channel community. For all in business, capital remains the
major concern. The channel community can also raise large amount of
money through forthcoming SME exchange. But then there is a basic
question to ponder upon-“Is the concept of SME exchange clear in
the IT channel community?” Talking about the exchange, Bengaluru
based Anantharam V Varayur, director, Webcom, said, “IPO is the
best way of generating capital for expansion than getting large
amounts through bank loans, VC funding and other investors. But we
are still not clear about the details and are completely unaware of
the opportunities.”

According to Bombay Stock Exchange,
BSE, SME Exchange has conducted several seminars for educating the
SMEs on the benefits of listing and preparations requi red for
listing on the BSE SME platform across length and breadth of India.
BSE SME has tied-up with channel partners who include various
institutions and associations engaged in the development of SMEs.
More seminars are lined up to cover all parts of the country in this
year. Additionally, BSE SME has planned for sectoral seminars for
auto ancillaries, infrastructure, pharmaceuticals, manufacturing,
agro based industries, suppliers to OEMS, etc. BSE SME is also
planning to take SME cluster approach in the development of SME
segment.

It is also planning to provide a
trading platform for the SME sector in the tier-3 cities by
organizing a meeting to create awareness about the proposal in
association with Indian Chambers of Commerce, ICC, etc. Contrary to
the belief of SEBI and BSE, many IT channel partners have not known
the concept enough to indulge themselves. The lower echelons of SMEs
have little or no knowledge about the situation or even if they know
they have certain ambiguities. Suresh Ramani, proprietor, Tech Gyan
and one of the major solution providers of Mumbai said, “I have no
idea about the SME exchange as of now. BSE or SEBI should create
better awareness programs for us to analyze the prospects of it.”
Jignesh Patel of Silver Touch Technologies, Ahmedabad said, “We are
yet to explore the pros and cons of the subject and are taking legal
advice regarding this. Though the seminars are conducted in Ahmedabad
but lots of questions and ambiguities remain in our minds regarding
the operations of SME exchange. We will wait for some time after it
gets started and then we would think to explore more.” Recently, BSE
SME seminar was organized in Bengaluru with Bangalore Chamber of
Industry and Commerce in association with Institute of Company
Secretaries to aware the masses about the advantages of the upcoming
platform.

In the event, Swapnil Mahajan,
senior manager, investment banking, Karvy Investors Services, made a
presentation on the benefits of the exchange but also pointed out
that awareness was one of the concerns and said, “Sectors need to
brace itself up with knowledge and preparations confirming to
compliance and accounting practices.” Apart from limitations in
terms of knowledge, it is also evident that some people are also
skeptical about the modalities of the exchange. Nikesh Sakaria of CDP
India, said, “I have heard about it but I have apprehensions about
the exchange as SEBI has no control of its approval. I am also not
sure how it would operationalize so it is not on our agenda as of
now. It is a wait and watch mode for us.”

Approximately there are 30 mn MSME
units in India and 12 mn are expected to join in the next 3 years.
There are so many SMEs which still have problems in raising equity
and debt capital. Though the website of the newly formed small and
medium enterprises states that SMEs contributes 8% to the country's
GDP, 45% to the manufactured output and 40% to the exports. It also
states that SMEs provides employment to about 6 crore people and MSME
sector forms the largest generator of employment in the Indian
economy. So, if maximum of the SMEs can get listed, the growth would
be multifold, but there is a prime need to drive the awareness
campaign and clear the apprehensions in the SMEs. In the early days
of August, Gugulothu, in an interview with one of the major
newspapers was also wary of the similar situation where he said,
“SMEs are not well informed of the capital market issues and the
modalities for raising equity capital. There is a need for conducting
awareness programs to educate them.” Benley Noronha of Nortech
Infonet, Cochin said, “I have just heard of it and we would like to
explore the cost benefits as well as the nature of it. It is too
early to say that I would like to get listed or not.” In totality,
the concept of SME exchange is new to the public and not many SMEs in
IT channels know it thoroughly. It is also clear that listed SMEs
will attract more investors for better access to alternate funding.
Banks, financial institutions will provide them the loans very
easily. The major challenge therefore is to instill confidence among
SMEs and get them listed. The execution also poses a challenge where
shares listed on the exchanges are often less known and may also give
rise to frauds.

Anandrao Balluru, owner, Par Data
Systems, Bengaluru said, “As of now I do not have any plans as I am
not fully aware of it. But definitely whoever wants to grow by 30%
y-o-y, IPO would add value to it. But there are also certain
limitations to it as IT channel community might be doing pretty well
but they not very much noticeable. So who will buy our shares in the
secondary market?”