SME POLICY SERIES 2 : SME Exchanges in India - Federation of ...

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) Forecasts are more futuristic in nature which may be frowned upon at the timeof due diligence by the Merchant Banker.c) Satisfying the information and disclosure requirements for minimum 50investors post issue may be more cumbersome for an issuer Company thansatisfying a few VCFs and PEs on the Board.d) Also the VCFs and PE investors are likely to bring in more domain expertise intheir association with the issuer Company than the passive investors throughthe IPO route.The above mentioned points may be true for service enterprises or new agetechnology oriented SMEs where VCF and PE options are available to the deservingentities with a good investment and business plans, the same may not be true for theconventional manufacturing industry. The VCFs and PEs may not be interested ininvesting in conventional industry providing modest returns with reasonableconsistency.For SME units belonging to the conventional manufacturing sector, the apprehensionof use of profitability figures if available in public domain by vendors and suppliers forhard negotiations on pricing is real and immediate as SME units would be expected todisclose in greater details and half-yearly periodicity, on their performance. On theother hand, unlisted public limited Companies may have to disclose profitabilityfigures once a year and the information is available through Registrar of Companies.To a certain extent it is not so easily available in public domain. Thus, accessingcapital market through listing on SME exchange and adhering to greater disclosurerequirements would have to be a reasonably balanced decision for an SME.Success of this renewedattempt by theGovernment of India(with necessary supportfrom the regulator) forencouraging setting upof SME exchanges istherefore crucial if thesmaller companies areever able to drawsupport from the capitalmarkets. The SMEexchanges have to notonly take off but alsoremain active andbuoyant for quite sometime. This can happenonly if the institutionalinvestors agree toparticipate in SMEexchanges until the retailinvestors enter the fieldand the exchangeacquires a critical mass.Because the size willgrow only gradually evena miniscule share of theirinvestible funds cansustain the exchanges.Success of this renewed attempt by the Government of India (with necessary supportfrom the regulator) for encouraging setting up of SME exchanges is therefore crucial ifthe smaller companies are ever able to draw support from the capital markets. TheSME exchanges have to not only take off but also remain active and buoyant for quitesome time. This can happen only if the institutional investors agree to participate inSME exchanges until the retail investors enter the field and the exchange acquires acritical mass. Because the size will grow only gradually even a miniscule share of theirinvestible funds can sustain the exchanges.4. Suggestions:[FISME carried out a series of discussions with MSMEs, Banks and FIs, SME Exchanges,Merchant Bankers, VCs, PEs, economists, financials experts and senior governmentofficials at New Delhi, Bangalore and Mumbai and the concerns of stakeholderswere finally discussed during a Stakeholders' Roundtable on SME Exchange' organizedon 28th March 2012 in New Delhi. The suggestions emerged during the roundtableare summarized thus. ]41. The unanimous conclusion of the intensive consultative process has been: Theonly way SMEs can access capital market is through intervention byGovernment of India by way of directions to the FIs and the Banks to earmark asmall proportion of funds for investing into the issues on SME exchanges.There are regulatory and process issues which can be sorted out without muchdifficulty once the BIG decision is taken by the Government.[Ministry of Finance may take required steps]2. To reduce this cost, it is proposed that it should be sufficient for the issuer torelease information through the website of SEBI, Merchant Banker, SMEExchange and its own website and also as part of important recordannouncements (as for announcement of Board Meeting, Book closure datesand record dates) in leading financial and national dailies. The same would in
any case be noticed by the targeted subscribers for the SME issues viz., institutions and HNIs. Theissuance of detailed advertisement by SMEs may be made optional in place of mandatory as ofnow.[SEBI may suitably amend SEBI (ICDR) Regulations, 2009].3. To address the issue of market making, a few structural changes suggested are:a) Onus on market making should not rest with Merchant Bankers. They should continue undertakingthe other fee based activity where they have a normal specialization.[SEBI may suitably amend SEBI (ICDR) Regulations, 2009].b) Onus of market making should be on banks, insurance companies and financial institutions,having large capital and assets base. A small portion of their portfolio cold be earmarked forinvestment in equity shares or specified securities issued and traded on SME Exchanges, say:1- For banks - 5% of the total investment portfolio in capital market or 1% - 3% of the net-worth(increasing annually by 1% point), whichever is lower. Investments made by banks in issueslisted on SME Exchange should be excluded rom the capital market exposure norms, providedthey are undertaken as part of market making exercise.[RBI may issue suitable guidelines including amendment tothe guidelines on the Capital Market Exposure Norms].- For insurance companies – 1% of Assets under management.[Ministry of Finance, GOI to advise insurance companies / IRDA suitably].c) Additionally, investment in SME equity as part of initial subscription or underwriting commitmentsor for market making purpose as a market maker or as a nominated investor should qualify aspriority sector lending. Banks may be asked to provide for market making in respect of at least 10SMEs per bank in a year. To begin with this target could be achieved over 2 – 3 years given thenascent nature of SME Exchange. However, if accepted, the banks could be asked to at least makea beginning in the current financial year. It may be mentioned here that banks are ideally suited forproviding market making and for taking an equity position in SMEs. By the very nature of workingcapital provided in the form of cash credit, the exposure is normally of a very long duration even ifreviewed and renewed on an annual basis. As such, during growing stage and upside swing for anSMEs, the performance of SMEs are normally better, commanding better lending terms frombanks. Conversely, during declining stage in the industry, when the performance of the SMEs is ona decline, the SMEs find it difficult to service high cost of borrowings.More often than not, banks are required to agree for reduction in interest rates in case anyrestructuring exercise is undertaken. Thus, though the assistance is given in the form of loans, it haspeculiar characteristics of risk capital except that banks cannot command higher returns in theevent of upside in the business of an SME.Given this backdrop, it would be beneficial for a Bank to grant assistance to SMEs as acombination of debt and equity, especially where they have had a good track record for pastassistance granted. The limits hereinabove suggested would enable banks identify good SMEs intheir portfolio and encourage them towards accessing capital market.[RBI to suitably modify the priority sector lending norms].d) RBI may frame guidelines to address the Banks' concern making investment in the unlisted sharesof SMEs to avoid such investments being construed as 'ever-greening' especially if the SMEs arerated in the top 3 on the internal rating scale of the Bank concerned or in the top 3 of the scale of theexternal credit rating agency.[RBI to suitably advise].1The prudential norms for banks limit capital market exposures to 20% of the Bank's Networth on a solo basis and 40% of the consolidatedNetworth on a consolidated basis (consolidated Bank would include licensed banks along with its subsidiaries).5
Page 1 and 2: FISME POLICY PAPER2October 2012SMEP
Page 3: c) Announcement of 'issue opening t
Page 7 and 8: AnnexureTax benefits to VCF / VCC a

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