Pankaj Chadha, Partner in a member firm of Ernst & Young Global, says the track record of companies listed on the SME Exchange could attract retail investors, although only when the companies move to main board. Excerpts from a conversation with Sarika Malhotra:
Q. How do you view the BSE's SME Exchange?
A. The SME Exchange acts as an enabler for small and medium enterprises and provides them with an active platform, informed investors and an opportunity to move to the main bourse once they have reached the level so required. Ease of the listing requirements enable SMEs to raise the required capital faster and at the same time get the necessary attention of the stock market.
Q. Why are some stocks on the exchange doing exceedingly well?
A. All SME issues are 100 per cent underwritten. More than 40 companies listed on the SME Exchange over the past three years, raising capital in excess of $75 million with more than 90 per cent of the companies trading above their target price. The SME Exchange offers a platform that is open to informed investors with a minimum investment of Rs 100,000. In addition, to ensure liquidity in the stock, there are market-making provisions for merchant bankers to support the stock for three years. The market makers' job is to support the stock by giving two-way quotes and hold a minimum specified amount of capital or stock in the SME. Market makers have to use proprietary funds only for this purpose.
Q. Who are the main investors on the exchange? What attracts them to invest in SMEs?
A. The platform is mainly meant to attract high net worth individuals and institutional investors. With liquidity being maintained through market-making provisions, investors would look at similar parameters relating to performance as in the case of main bourse companies, although with medium to long-term perspective.
Q. How do you see this space unfolding in the future? Will retail investors also participate?
A. The platform is young and is being tested. Consistency of performance would determine how many more companies are attracted to the SME Exchange for listing and a healthy track record of such listed companies could attract retail investors, although only when the companies move to the main board.
Q. Any blips to watch out for in the space?
A. With low level of activity, it appears that companies and investors are careful before committing to list on the exchange. With SMEs contributing significantly to the economy, the potential for growth of the SME Exchange is significant. The regulations are enabling and continuing success of listed companies on the exchange would determine its growth and the entry of other companies in the future.