Stock exchanges, merchant banks want insurance companies to invest in SMEs

Market intermediaries, including stock exchanges and merchant bankers, want the government to allow insurance companies to invest in public issues of small and medium enterprises (SMEs). The demand comes at a time when both BSE and NSE have formally launched their SME segments and are looking at getting more long-term institutional investors.

According to persons familiar with the development, industry players have already raised this issue with the government and the regulators. They, however, add that a final decision would take some time as it involves changes in the norms governing capital market investment of insurance companies.

?The issue has been raised at various forum and interactions with the policymakers,? said an industry player on the condition of anonymity. ?In fact, we have said that apart from insurance companies, even banks should be told to allocate a small share of their stock market exposure to SMEs,? he added.

According to current norms laid down by the Insurance Regulatory and Development Authority (Irda), an insurance company cannot invest in any initial public offer (IPO) of less than R200 crore. As a result, insurance players cannot invest in any SME IPO that typically is in the range of R50-100 crore in size.

While both BSE and NSE have an active SME platform, liquidity has been a major cause for concern even though market making has been made mandatory. Market watchers say that the segment lacks presence of serious long-term investors apart from venture funds and private equity players.

?Insurance companies have access to a large pool of long-term capital,? says Ravi Tyagi, who heads the SME initiative of NSE. ?If a very small percentage of their assets under management is channelised into the SME market, it will give a huge boost to the platform,? he added.

Insurance companies are dominant players in the market and have always been looked upon as a formidable counterpart to the foreign institutional investors (FIIs).

Though they have seen a dip in their stock market activities in the last couple of years, they are still known to be long-term investors who provide the much-needed stability to the volatile equity market.

Both BSE and NSE had launched their SME platform in March. While BSE managed to get seven companies on board, NSE will see the first listing by next week. MCX Stock Exchange (MCX-SX), which intends to start its equity bourse around Diwali, will also launch its own SME platform.