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SME Exchange

Let's be realistic

Raunak Gokhale
Sep 2011

There has been much déjà vu about SME exchange. NSE and BSE have both got a nod for starting an SME exchange in India. Undoubtedly SMEs are the backbone of Indian Economy. Their contribution to Indian economy has been significant both in terms of GDP and creating employment opportunities. It is obvious that SMEs need capital to grow. Until now the only solution available was to look out for Venture Capital and Private Equity Investors. SME exchanges are expected to provide opportunity to SMEs to raise capital at a reduced cost.

But are the SME's in picture have really grown and are competent enough to follow through the burden of performance that come tag along with a listed status. Investments by Venture Capitals and Private Equity investors are made with an assumption that 9 out of 10 companies would fail. The gamble is that the 10th investment will not only make up for the other nine failures but also provide sufficient returns on the capital investment. The annual report of 2010-11 for Ministry of Micro, Small and Medium Enterprises, Government of India has put out an elaborative census data on state of MSMEs in India. Every year RBI also publishes a data on position of Sick SSI/MSE Units. If you compare the no of new SMEs that have come up every year against those that have been reported sick, the data is as high as 90% indicating the high failure rate in SMEs. But imagine this happening for SME's listed on SME Exchange. What will happen, if say even 50% all companies in your portfolio of listed SME stocks just vanish each year. I am sure a typical Indian investor or even a so-called risk taking intelligent investor will be disillusioned with such a market and may even wrongly extrapolate this logic to the main board companies.

An Issuer Company whose post issue paid up capital does not exceed Rs 10 crore is to be listed on SME exchange. Companies whose post issue paid up capital falls between Rs 10 crores to Rs 25 crores has an option to consider SME board or the Main board. Now if we do a quick update on companies listed on BSE Main board, more than 1500 companies listed have paid up capital less than Rs ten crore. More than 2500 companies listed have paid up capital in range Rs 10 crore to Rs 25 crore. Thus almost 80% companies listed on BSE main board qualifies to be listed on SME exchange and still we are talking of a separate SME exchange.

Further the remission of regulatory obligations is very little and the costs in terms of compliance are nearly as much as a regular listed company. The additional responsibility of market making is growing to add cost burden to the SMEs. I am sure none of the Investment Banks will incur this cost out of their own pockets.

Is there really a need for a separate SME exchange? When I would say a one already exists and is consisting of Companies that have grown to a size, have shown potential and have a promising future ahead. SMEs would rather wait for a few years and list on the main exchange rather than list prematurely and make enemies who could be friendly investors in the future.

Raunak Gokhale is Associate, Keynote Investment Banking,

kenote Corporate Services Limited

1 Comments >>

Nikhil Oltikar

30 Nov 2011 (06:21:09)

Dear Raunak, Your logic and reasoning are both quite sound. Yes most SMEs fail after a few years of success. Most SMEs are a one man show. Most of them fail because they have no idea how to sustain their success. 1. SMEs start very well. They enjoy initial success of a couple of years. 2. Riding high on initial success, they plan expansion due to increasing orders. 3. If their bankers' do not agree to provide required funds or if their margin is not enough, they route it through the existing working capital. This is where they fail. 4. More demand for funds means more collateral required by banks. Then starts the rabbit hole experience. Not being able to sustain the high momentum due to high interest rates and lack of collateral, SMEs start their descent into the rabbit hole. While you are right that 90% of SMEs fail, I would like to know more about their reason for failure. Most Banks today demand 100% primary security and 100% collateral. For an SME which requires ,say Rs. 5.0 crore, where will this come from? Bottom line, if you do not have a sufficient collateral, you cannot get loan from Indian banks. If the idea of an SME exchange is not so good, then I believe this calls for cheaper money from Banks. What's killing the SMEs today is not competition but very high cost of funds.

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