Financing remains a key hindrance to the growth of MSMEs in India. Though the flow of bank credit to SMEs has risen in recent years, thanks to government policies that improved credit delivery at a subsidised cost, severe constraints still exist for small units in raising finance. Several factors, such as the lack of collateral and information asymmetry, are responsible for this. To leverage the full growth potential of MSMEs and give them greater fund raising options, alternative means of financing, such as factoring services and SME exchanges, have to be promoted. In the previous article (Sept 17) we had discussed factoring services as an alternative mode of working capital financing. This article will deal with the concept of SME exchange.
SME exchanges are now an important alternative source of finance for SMEs globally. A dedicated SME exchange gives MSMEs an opportunity to boost their capital and presents private and corporate investors with a wide array of investment options. Across the world, such exchanges have been playing a key role in financing small enterprises, thereby facilitating the evolution and growth of well-managed, quality enterprises.
In India, the process for setting up SME exchanges has recently been initiated and market regulator Sebi has issued guidelines for trading on the SME platform. However, a point to note here is that the past initiatives at an SME exchange, which included the Over-The-Counter Exchange of India (OTCEI) set up in 1989 and the Indo-Next Platform for SME on BSE launched in 2005, have not been successful. While the concept of SME exchange is not new to India, focused efforts from the regulator and exchanges would be required to make a successful beginning in this niche field.
SME exchanges would, no doubt, facilitate the future growth of the MSME sector. An SME exchange will help small companies with a good track record to raise capital through equity shares. Today many good enterprises are denied a listing, since they do not meet the minimum paid-up capital requirement of the main exchanges. An SME-focused stock exchange would correct the situation and boost the confidence of small enterprises.
Availability of easy and low-cost capital through dedicated exchanges will give a fillip to the SME sector and boost domestic employment. With Sebi acting as the regulator for SME exchanges, the governance process and practices of SMEs will become more transparent. Moreover, strict listing norms would impart discipline in their overall functioning, especially in accounting standards. A listing would enhance the status of small companies, and give them spin-off gains in brand building, visibility and recognition .
Many players, including the BSE, NSE and MCX, have shown an interest in setting up a separate SME platform or developing a new exchange. But a point to be noted is that the earlier initiatives at developing such alternative platforms–such as OTCEI and Indo-Next?failed to pick up on low investor participation, illiquidity and lack of awareness. So, it is imperative for aspiring exchanges to learn from such past experiences, and also from successful SME exchanges like the AIM and the AltX.
Effective disclosure standards, along strict norms for investor protection, would go a long way in ensuring increased investor participation on SME exchanges. Sound financial health of participating companies also have to be ensured.
In an attempt to encourage participation in SME exchanges, Sebi has given several certain listing relaxations to companies. While those relaxations (see box) would encourage small companies to list on the exchanges, they might limit investor participation. For instance the relaxation given to the companies to declare their financial results every six months might increase the risk perception of investors, keeping them away from the exchange. Moreover, the proposal to limit the trading lot to Rs 5 lakh could hamper liquidity in the market and increase the impact cost for investors.
Although the stage is set for the development of SME exchanges, we need to wait and watch to gauge the market response to these initiatives. The good news is that SMEs consider a dedicated stock exchange as a viable option to meet their funding requirements. According to a study done by Dun and Bradstreet, India, on SMEs in the auto component and leather clusters in Chennai, around 97% of the total companies surveyed agreed that SME-focused stock exchanges could mitigate the financing problems of MSMEs.
The author is senior economist, Dun & Bradstreet India