Market players seek incentives for SME segment participants

Say current norms make it difficult for VC-and PE-backed cos to list on SME platform

Market intermediaries have asked the Securities and Exchange Board of India and the government to announce incentives for potential participants in the small and medium enterprises (SME) segment. They say that the current regulatory framework has made it difficult to get entities like venture funds, private equity (PE) players and even merchant bankers to participate on the SME platform.

Market players, involved in the developments, say SME segment needs tax incentives for investors, more categories of ‘nominated investors’ to support market-making activities and rationalisation of merchant banker obligations to generate sufficient liquidity.

?All that we want is some tweaking in the regulatory framework so that more VC and PE-backed companies look at listing on the SME platform,? says a senior industry player involved in the discussions. ?We have made policymakers aware of the problems and are hoping for some positive action,? the industry player added.

Market players say that many venture capital and PE-backed companies would come for listing if such institutional investors are given some tax benefits. One of the idea mooted is that securities transaction tax (STT) be levied on VC/PE when they make an offer for sale while listing a company, thereby eliminating any capital gains tax.

Intermediaries involved in the development of this niche platform further say that insurance companies should be allowed to invest in IPOs of companies listing on SME segment. The current guidelines do not allow insurance companies to invest in such small IPOs. Also, only actively-traded companies can be considered for investments, according to norms laid.

?If the SME platform has to be developed, some amount of hand holding is required,? said a head of a merchant banking outfit, backed by a nationalised bank. ?Insurance companies are long-term and serious investors and so should be allowed a waiver for investing in SMEs,? he said.

There is a consensus among market players that until institutional investors like VCs, PEs or mutual funds do not come to the SME platform, attracting other investors like high networth individuals would be a difficult task. Interestingly, merchant bankers are also trying to form a business model around the current market making requirements of three years since listing. They are evaluating the kind of entities who could provide them with a line of credit for market making at a reasonable margin.

The headwinds caused by the current regulatory framework are clearly visible. Even after a month and a half since BSE went live with its SME platform with the listing of BCB Finance, there has been no other listings till date. While stock exchange officials, at various forum, have said that they are working on creating an efficient and robust ecosystem for SME listings, the going has been slow and difficult.