Easier capital market access for SMEs




Securities and Exchange Board of India’s move seeks to address the special needs of this vital sector in raising resources




--------------------------------------------------------------------------------

Regulatory moves to address the special concerns of small and medium enterprises are welcome but their success will depend on many factors beyond the SEBI’s control.


--------------------------------------------------------------------------------




A small and medium enterprise unit in Tirupur.

Two recent decisions by the Securities and Exchange Board of India Board have far reaching implications for the capital market. One of these seeks to address the special concerns of small and medium enterprises (SMEs) in raising resources. The second decision allows the auctioning of shares in a public issue subject to certain conditions.

The common problems faced by SMEs in raising resources are well known and begin with the initial public offer itself. As a share offering by a medium enterprise cannot obviously be large, the high issue expenses become particularly burdensome. Certain pre and post issue expenses are fixed in nature and do not vary with the issue size. Whether an IPO is for Rs. 1 crore or Rs. 100 crore, expenses under certain heads such as advertisement, travel or stationery will be almost the same.

In fact a smaller company may have to spend proportionately more on advertising and publicity to gain ‘visibility’. The point is SMEs face relatively high entry barriers to the capital market. Even after listing a smaller company’s stock will more likely be illiquid. Merchant bankers, who generally get their fees as a percentage of the issue size, are naturally less enamoured of the SME business. There have been other reasons as well for policy to aim at facilitating capital market entry for SMEs. Banks will remain the traditional source of funds for them but a stock exchange listing is desirable and sometimes even necessary. Whenever small enterprises receive venture capital or any other form of equity support including from State government organisations a listing helps in the exit of these investors later. A stock market quotation, in any case, is an invaluable benchmark.