This article was originally published in Postnoon on May 11th, 2012

http://postnoon.com/2012/05/11/sme-exchanges-new-kid-on-the-block/48033

“The students of B-Schools now a days are so much more up to date with the latest news that we have to be on our toes. It is so different from the days when there was no Internet and majority of the students were content with what the professors and the books taught”, thought Prof. Nicky while walking to her class on Investments.

Dheeraj was the first to raise his hand, as usual.“Go ahead Dheeraj. Ask your question”, she said.

Dheeraj: Prof. Nicky, I recently read that the BSE and the NSE have launched new platforms for the Small and Medium Enterprises (SMEs) to raise equity through IPOs. Why do they need a separate exchange? Why can’t they get listed on the main exchange?

Prof. Nicky: Because you must compare artists with artists and geeks with geeks. What I mean to say is that the SMEs have different characteristics in terms of growth, number of employees, size, and risks. They tend to get lost in the pool of large, multi billion organisations on the main exchange. The larger companies get all the visibility, pushing the smaller ones to the periphery, making them illiquid.

Dheeraj: But if the companies are good, won’t they anyways get noticed?

Prof. Nicky: Ideally yes! There are many companies which are good and have the growth potential, but they are perceived as having very high risk due to their size. This keeps the investors away.

Also, being listed on the main exchange is an expensive affair. There are many costs like the fees of the merchant banker and marketing costs pre IPO. Followed by expenses to meet the regulatory and legal requirements of disclosures, reporting etc.

Rajat intervened to ask, “So aren’t these expenses going to be there even in the case of SME exchanges?”

Prof. Nicky: The SEBI has tried to minimise these expenses as much as possible. Instead of Quarterly reports, the SMEs need to publish only half-yearly reports. That too only on their website. They can send an abridged version of the report to the shareholders instead of the full version. SEBI has also tried to keep the marketing and stationery costs of IPOs minimum.

Abhijeet: Professor, what is the benefit to the investors like you and me? Why should we bother about the SME exchanges?

Prof. Nicky: When a SME gets listed on an SME exchange, it adds credibility to the company and its business. There is a compulsory credit rating requirement before getting listed. SEBI has mandated appointment of market makers for these companies who would provide liquidity to the market. So as investors, we can now invest in these companies, which by nature are riskier, but have a higher growth potential and hence have the potential to provide higher returns.

Though the ticket size for investing in these companies is fairly large, a minimum of Rs1 lakh. The idea is to shield the retail, smaller investors from any kind of risk. But high net worth individuals and financial institutions like banks, mutual funds, venture capital and private equity funds etc. can invest in them.