NextBillion - An Initiative of the William Davidson Institute at the University of Michigan

Tuesday, March 13, 2012

For the third time in the Indian stock market history, small and medium enterprises (SMEs) now have a new platform to access funds from people other than friends and family in the Bombay Stock Exchange (BSE) SME exchange that completed its first initial public offer (IPO) in February.

On the face of it, this exchange should be a god-send for India’s 26 million SMEs who suffer a chronic problem accessing capital. So where India’s Big Two – the National Stock Exchange and BSE – stipulate a minimum paid-up capital of Rs 10 crore, companies with lower paid-up capital can raise as little as Rs 50 lakh on this new SME platform.

According to the Securities and Exchange Board of India (Sebi), the new platform has been formulated after a detailed study of best practices from across the world and feedback from market participants. It has also taken into account learning from past attempts. One was Over-the-counter Exchange of India (OTCEI), launched in 1990 with aim of becoming the Nasdaq of India; it introduced many concepts that were new to the Indian capital markets then such as screen-based nationwide trading, sponsorship of companies, market making and scripless trading. However, the 1992 scam and the bear market that followed killed the initiative.

BSE Indonext, launched by then Finance Minister P Chidambaram in 2007, was specially created to cater to SMEs listed on regional stock exchanges. Since regional stock exchanges were unable to attract trader attention for lack of advanced technology, BSE tried to give them a lease of life under the new platform. The companies listed on BSE IndoNext, however, did not attract much market participation either.

So how is the BSE SME different? The concept is similar to the OTCEI, but additional safeguards such as 100 per cent underwriting of offerings, easier compliance norms such as half-yearly reporting instead of quarterly for bigger firms, and the provision to migrate to the main board have been put in place.