SME Exchanges: BSESME and Emerge 5‌

SME exchange is a stock exchange dedicated for trading the shares of small and medium scale enterprises (SMEs) who, otherwise, find it difficult to get listed in the main exchanges. The concept originated from the difficulties faced by SMEs in gaining visibility or attracting sufficient trading volumes when listed along with other stocks in the main exchanges.

To be listed on the SME exchange, the post-issue paid-up capital of the company should not exceed Rs. 25 crores. This means that the SME exchange is not limited to the small and medium scale enterprises (which are defined under the ‘Micro, Small And Medium Enterprises Development Act, 2006’ as enterprises where the investment in plant and machinery does not exceed Rs. 10 crores). As of now, to get listed in the main boards like, National Stock Exchange, the minimum paid-up capital required is Rs. 10 cr and that of the BSE is Rs. 3 cr. Hence, those companies with paid-up capital between Rs. 10 cr to Rs. 25 cr have the option of migrating to the Main Board/or to the SME exchange. The companies listed on the SME exchange are allowed to migrate to the Main Board as and when they meet the listing requirements of the Main Board. There shall be compulsory migration of the SMEs from the SME exchange, in case the post-issue paid-up capital is likely

to go beyond the Rs 25 crore limit.

World over, trading platforms/exchanges for the shares of SMEs are known by different names such as Alternate Investment Markets or Growth Enterprises Market, SME Board etc. Some of the known markets for SMEs are AIM (Alternate Investment Market) in UK, TSX Ventures in Canada, GEM (Growth Enterprise’s Market) in Hong Kong, MOTHERS (Market of the High-Growth and Emerging Stocks) in Japan, Catalist in Singapore and Chinext, the latest initiative in China [see ‘World Federation of Exchanges’ for latest comparative idea].

Globally, most of these SME exchanges are still at an evolving stage considering the many hurdles they face —

(i) Declining prices of listed stocks and their illiquidity,

(ii) A gradual reduction in new listings and decline in profits of the exchanges etc., (for instance, AIM had three predecessors; CATALIST succeeded SESDAQ with new regulations and listing requirements).

(iii) In most jurisdictions, idea of a separate exchange for SMEs have become unviable and hence tend to be platforms of existing exchanges, perhaps cross-subsidised by the main board/exchange.

In India, similarly, after the two previous attempts—OTCEI (Over the Counter Exchange of India, 1989) and Indonext—the market regulator, SEBI, on May 18, 2010 permitted setting up of a dedicated stock exchange or a trading platform for SMEs. The existing bourses/stock exchanges in India, BSE and NSE went live on March 13, 2012 with a separate trading platform for small and medium enterprises (SMEs). BSE has named its SME platform as BSESME, while NSE has named it as Emerge.

Unlike in India, many of these SME exchanges in various countries operate at a global level, due to smallness of the market, allowing for listing by both domestic as well as foreign companies. Though the names suggest that they are set up for SMEs, these exchanges hardly follow the definition of SMEs in their respective jurisdictions. Also, many of them follow a ‘Sponsor- supervised’ market model, where sponsors or nominated advisors decide if the listing applicant is suitable to be listed or not, i.e., generally no quantitative entry criteria like track record on profitability or minimum paid- up capital or net worth, etc., are specified to be listed in these exchanges.

Instead, they are designed as ‘buyers beware’ markets for informed investors. SEBI has also designed the SME exchanges in a similar format with provisions for ‘market making’ for the specified securities listed on the SME exchange.

As is the case globally, certain relaxations are also provided to the issuers whose securities are listed on the SME exchange in comparison to the listing requirements in the Main Board (such as in BSE and NSE, in the case of India), which include:

(i) Publication of financial results on ‘half yearly basis’, instead of ‘quarterly basis’, making it available on their websites rather than publishing it.

(ii) Option of sending a statement containing the salient features of all the documents instead of sending a full Annual Report.

(iii) No continuous requirement of minimum number of shareholders, though at the time of IPO there needs to be a minimum of 50 investors, etc.

(iv) The existing eligibility norms like track record on profits, net worth/net tangible assets conditions, etc., have been fully relaxed for SMEs as is the case globally.

(v) However, no compromise has been made to corporate governance norms.

Common Facts about the National Stock Exchanges

Before the arrival of national level stock exchanges, India was not having any exchange of national status—better say there was no Indian stock market, but stock markets showing only regional pictures. Besides, the national stock exchanges did solve some major problems of stock market, we may also call their arrivals as part of the stock market reforms in India. The common features of these exchanges are:

(i) all are situated in Mumbai;

(ii) all do screen-based trading (SBT);

(iii) all have their trading terminals in the major cities of the country;

(iv) all are web-enabled;

(v) all are limited liability companies;

(vi) the brokers registered here have no say in either the ownership or the management of the exchanges;

(vii) all are counted among the best and the most technology-equipped stock exchanges in the world.6

Players in the Stock Exchanges