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1. Saturday, 01 June 2013
SME Exchanges in emerging markets
Sourajit Aiyer
Small and Medium Enterprises (SMEs) not only provide key inputs to the Indian industry, but are also estimated to
contribute 20 per cent of India's GDP and is the country's second largest employer. Given the SMEs' importance in the
Indian context, an SME exchange is believed by many to give a boost to their finance raising needs, as otherwise many of
such firms may find it difficult to garner equity financing on the main exchanges and receive higher infusion from lenders
looking at the large-sized clients. Such a financing platform would attract early stage, growth investment firms, which may
get a niche platform to analyze and invest in the 'next generation' of Corporate India's blue chips.
However while the Bombay Stock Exchange (BSE) recently announced SME exchange platform is a positive move in this
direction, the success of the venture will largely depend on its format and execution - which faces some challenges. Firstly,
this platform will need to bring together the Indian SME universe, which is very diverse in terms of sectors and services.
Investors will need to study research on these companies, and shares listed on smaller exchanges are often less
researched. The ability of sell-side intermediaries and buy-side managers to ensure regular delivery of research insights on
such a diverse sector universe is a challenge, given the specific skill-sets and knowledge that each sector demands.
Moreover, lack of corporate governance practices and regulatory disclosures in some of the small companies due to the
high cost of compliance, increases the risk factors, which makes the process of stock-selection challenging. Secondly, the
success of BSE and NSE (National Stock Exchange) has been in scrips with high liquidity. These are the scrips that have
been in the radar of investors, both domestic and foreign investors. As a result, only about 40 per cent-odd of all listed
stocks are actually traded actively. In fact, most of the scrips with lower trading volumes on the main exchanges are the
smaller companies, who struggle to get investor interest. In times of broad-based market rally, there is still some interest
that flows down to the smaller mid-caps and small-caps following the initial rally in the large-caps. However, during periods
of market downturn, these smaller companies struggle to generate investor interest. Lastly, the primary markets have
remained largely muted in terms of activity levels since the last year or so, especially in the equity side.
Globally, SME markets have seen mixed response. Most of the SME exchanges are part of the larger exchange
organisations, similar to the BSE's SME exchange venture. Some global examples are the UK's AIM which kept flexible
requirements like no minimum listing size and trading in any freely available currency, Japan's Jasdaq which targeted only
small technology stocks, the US's Nasdaq First North for small, young and growth companies, Tokyo Exchange's Mothers, a
market for high-growth and emerging stocks which provides venture companies access to funds at an early stage of their
development, London's PLUS Markets which aims to create a deep pool of small & mid-cap liquidity in Europe, Toronto
Stock Exchange's TSX Venture Exchange which provides access to public venture capital to facilitate growth for new
ventures, Johannesburg Stock Exchange's Alternative Exchange, a parallel market focused on good quality small and
medium sized high growth companies, and Hong Kong's Growth Enterprise Market, which offers growth enterprises an
avenue to raise capital and investors an alternative of investing in high growth-high risk businesses.
To address the challenges, the BSE's SME exchange would need to identify high growth sectors and companies and ensure
those stocks get listed on its platform. Increasing research coverage into these companies' growth story to attract retail
interest and small-sized investment firms would be a key enabler in generating interest, activity and liquidity. On the
distribution side, the key for sell-side intermediaries would be to identify and target niche pockets of liquidity for this
segment. Improving corporate governance and adherence to good governance principles would prevent frauds, and it is
critical to identify those who score highest on corporate governance practices, including audited accounts disclosure,
annual management statements and enterprise policy statements. SMEs may bring in further professional management
and independent board members who can utilise their experience and talent to take those companies to a higher growth
trajectory. The transaction costs involved should be made affordable. Lastly, the launch timing is dependent on the existing
market conditions, so time it right. Access to capital at the right time to a growth company can reap rewards. However,
addressing the concerns should priority, in order to build the long-term reputation, trust and participation levels.
(Disclaimer: The views expressed in the article are entirely personal, and are not meant to represent those of the
company. This article is meant for information purposes only, and does not construe to be any investment advice, offer or
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2. solicitation for any financial instrument. Any action taken on the basis of the information contained herein is one's
responsibility alone.)
The writer is Senior Manager - Investor Relations (Corporate Planning), Motilal Oswal Financial Services, Mumbai
sourajitaiyer@gmail.com
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