SEBI To Ease SME Listing Guidelines

The much talked-about SME platform is expected to undergo some changes in the future as the capital market watchdog SEBI is trying to ease the listing norms. The BSE SME platform has seen a total of 13 listings while the NSE EMERGE has seen only 2 listings so far, indicating that only a handful of companies have gone public since the launch of the SME platform.

The platform is a pretty new concept in the country and has not gained much popularity so far. SEBI has devised strict criteria for SME listings for lead managers, investors as well as companies. This has become a roadblock for the companies to go public. Some of its mandatory conditions require companies to have minimum total assets and networth of Rs 1 crore each. They also need to dilute 25% of the equity during the IPOs. SEBI's requirement is completely justified as it only wants good businesses and its promoters to go public. It is however not understood as to why it has gone so strict on the lead managers and investors.

The requirements set for the lead managers have proved to be a big setback to the entire idea of providing valuable capital to the emerging businesses. As per the current norms, lead managers are required to underwrite the full issue in case of poor subscription. They are also expected to act as market markers for three years, which creates a liquidity trap for them. Besides, for the investors, the current lot size of Rs 1 lakh acts as a barrier to buy/sell the securities.

According to the head of capital market division of one of the lead managers, the concept of Rs 1 lakh lot size is justified during the initial subscription period but the same is not reasonable when investors want to offload some portion of their holding. If the investor is happy with the performance and he/she wants to keep some portion of the holding, he cannot do so due to the current norms. This decreases the enthusiasm of participating in the SME scrips and makes them illiquid counters.

SME is a high risk - high return concept, as a result of which the current retail participation is very low. One has to understand that the businesses listing on the SME platform are emerging businesses and involve a very high risk. The head of the lead managers we mentioned above, also said that the retail investors should not participate in SME IPOs due to the high-risk nature of the companies as well as less liquid counters. Those who can wait for 4-5 years should only enter the SMEs.

Considering these problems, the lead managers recently voiced their concern to SEBI. They have now requested SEBI to reduce the lot size as well the period of market making. Besides, SEBI is also looking to ease the underwriting as well as equity dilution norms, which means one could see both of them relaxed if they are considered by the SEBI.

The listed companies on the SME platform are currently doing well. Of the 15 companies listed on the SME platform on both the bourses, prices of 3 companies have surged over 100%, while another four counters are up by more than 20%. Only 3 counters are currently quoting a price below the offer price. Currently about 10 companies are lined up to get listed on the bourses and one can expect the number to go up when the new listing guidelines are implemented by SEBI.

The real game changer, however, would be if any of the movement of companies listed on the SME platform to the main platform. One would then see a huge response to the SME IPOs.