The entrepreneurs and investors for long have had to bear the problems related to lack of liquidity options for small firms. These participants in the small and medium enterprises, scouting for the best possible way to tackle the problems of raising cash can achieve it through SME Exchange set up by Bombay Stock Exchange (BSE) that enables the small companies to float Initial Public Offers (IPO) in which the retail investors can participate. The exchange will be made for use in the month of August.
"Companies can now raise as little as Rs 25 crore on the exchange all the way up to Rs 200 crore," said Lakhsman Gugulothu, CEO, BSE SME. What started as a white paper discussion in 2008 has now gathered steam, after almost three years and multiple iterations. The BSE and the Securities and Exchange Board of India (SEBI) are now in the final stages of arriving at a consensus.
For a company to get enrolled on the SME Exchange, it needs to have a track record of distributable profits for at least three years. This criterion is already stirring debate in start-up circles. While such norm can be credited with providing protection to the retail investors, but there is a risk of losing out on the potential of fast-emerging sectors like e-commerce and mobile technology. "Internet firms like mine won't be profitable for many years to come. This means the exchange will be completely out of bounds for the entire sector," said Manu Agarwal of online start-up Naaptol.com.
In the past, e-commerce firms such as Makemytrip.com have side-stepped the BSE and have gone public on the NASDAQ instead. But BSE officials are clear why they have chosen caution over experimentation. "In SME exchanges globally, there have been cases of fraudulent companies and given that this is a new initiative, our first priority is to protect the retail customer," said Ashish Chauhan, deputy CEO of BSE Exchange. "But the law is not cast in stone. After the exchange has some success, this regulation could well be looked at," he added. The post- listing policy has also been brought forward to the companies, it states, “Companies with post issue face value capital of less than Rs 10 crore have to list on the SME exchange only. While those in the bracket above Rs 25 crore will be listed on the main exchange. Companies with post-issue face value capital between Rs 10-25 crore have a choice of listing on either the main exchange or the new SME bourse”.
Role of the Banker
Commercial bankers need to understand that their role in this exchange is imperative. They are the ones who will determine the pricing within which the companies will be listed, they also need to assist the companies for duration of 3 years, and underwrite the complete issue size for them. Whereas Investment bankers will be assigned with a duty of underwriting 15% of the issue from their own fundings, and the rest 85% to be brought in through external investors.
This has created a furor among many entrepreneurs, as they feel the model might not sustain in the long-run.