N Sundaresha Subramanian

Mumbai: The SME exchange, which will enable small and medium enterprises to raise capital cheaper, faster and more efficiently, is finally taking shape. In a definitive step that might start a 1000-mile journey, the market regulator laid out the broad contours for an exchange in a discussion paper on Monday.

However, Sebi proposes to allow only “informed, financially sound and well-researched investors” in the proposed exchange. To ensure that small fish do not get trapped by fly-by-night operators, the regulator has proposed a minimum investment size of Rs 5 lakh at the time of IPO.

This ticket size is also proposed to be applied for the secondary market. Accordingly, a minimum trading lot of Rs 5 lakh is prescribed for secondary market trading. However, it plans to allow retail participation through the mutual fund route.

“To facilitate retail participation in SMEs for investors having high-risk appetite, specific allocation through mutual funds may be permitted,” the discussion paper said on Monday.

For being eligible to participate in the SME exchange, a company must have a maximum post-issue capital of Rs 25 crore. Specialised merchant bankers may be licensed for exclusively catering to the needs of the SME segment.

Sebi also is looking to reduce much of its headache as there may not be any requirement of vetting of the offer document by Sebi.

“The intended investors are expected to make informed and calculated investments,” is the rationale. As per the existing DIP guidelines, the issuer company is required to have net tangible assets of at least Rs 3 crore in each of the preceding 3 full years, a track record of distributable profits for at least 3 out of immediately preceding 5 years and a net worth of at least Rs 1 crore in each of the preceding 3 years.

These may be relaxed completely for SMEs. Price discovery may be made through fixed price mechanism or through the book building process. Underwriting may be made mandatory and it may be also mandated that the merchant bankers for the IPO, be required to compulsorily fully underwrite the issue.

The merchant bankers/underwriters in the IPO may be compulsorily required to be market makers for the company. The issue should be through electronic applications only, eliminating all costs associated with paper printing and processing.

Reporting of results by the companies listed on the SME exchange may be made on a half yearly basis instead of quarterly basis. Further, they may be required to file only unaudited results.

A simplified and abridged version of the annual report may be prepared by the company and the requirement of sending full annual reports to all the shareholders may be dispensed with.

Instead, the companies may post their annual reports on their websites or of the exchange. Physical copies of the same may be provided to the shareholders only on specific request.

The companies listed on the SME exchange may migrate to the bigger exchanges as and when they meet the listing requirements of the bigger exchanges.

Source : DNA