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SME Exchange / Platform

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SME exchange is a stock exchange dedicated for trading the shares of small and medium scale enterprises (SMEs) who, otherwise, find it difficult to get listed in the main exchanges. The concept originated from the difficulties faced by SMEs in gaining visibility or attracting sufficient trading volumes when listed along with other stocks in the main exchanges. World over, trading platforms / exchanges for the shares of SMEs are known by different names such as Alternate Investment markets or growth enterprises market, SME Board etc.

Some of the known markets for SMEs are AIM (Alternate Investment Market) in UK, TSX Ventures in Canada, GEM (Growth Enterprise Market) in Hong Kong, MOTHERS (Market of the high-growth and emerging stocks) in Japan, Catalist in Singapore and the latest initiative in China - Chinext. (For comparative statistics see World Federation of Exchanges).

In India, “SME exchange” is defined in Chapter XA of the Securities And Exchange Board Of India (Issue Of Capital And Disclosure Requirements) Regulations as a trading platform of a recognised stock exchange or a dedicated exchange permitted by SEBI to list the securities issued in accordance with Chapter XA of SEBI (ICDR) Regulations and this excludes the Main Board (which is in turn is defined as a recognized stock exchange having nationwide trading terminals, other than SME exchange).

To be listed on the SME exchange, the post-issue paid up capital of the company should not exceed Rs. 25 Crores. This means that the SME exchange is not limited to the Small and Medium Scale enterprises which are defined under [1] The Micro, Small And Medium Enterprises Development Act, 2006 as enterprises where the investment in plant and machinery does not exceed Rs. 10 crores. As of now, to get listed in the main boards like, National Stock Exchange, the minimum paid up capital required is Rs. 10 cr and that of Bombay Stock Exchange is Rs. 3 cr. Hence, those companies with paid up capital between Rs. 10 cr to Rs. 25 cr has the option of migrating to the Main Board / or to SME exchange. The companies listed on the SME exchange are allowed to migrate to the Main Board as and when they meet the listing requirements of the Main Board and there shall be compulsory migration of the SMEs from the SME exchange, in case the post issue paid up capital is likely to go beyond Rs 25 crore limit.

Globally, most of these SME exchanges are still at an evolving stage considering the many hurdles they are facing like, declining prices of listed stocks and their illiquidity, a gradual reduction in new listings and decline in profits of the exchanges etc. For instance, AIM had three predecessors; CATALIST succeeded SESDAQ with new regulations and listing requirements. In most jurisdictions, idea of a separate exchange for SMEs have become unviable and hence tend to be platforms of existing exchanges, perhaps cross-subsidized by the main board / exchange. Similarly, in India, after the two previous attempts -Over the Counter Exchange of India and Indonext - the market regulator, Securities and Exchange Board of India (SEBI) vide its [2] circular dated May 18, 2010 has permitted setting up of a dedicated Stock exchange or a trading platform for SMEs. The existing bourses in India, BSE and NSE went live on 13 March, 2012 with a separate trading platform for small and medium enterprises (SME). BSE has named its SME platform as BSESME while NSE has named it as Emerge.

Unlike in India, many of these SME exchanges in various countries operate at a global level, due to smallness of the market, allowing for listing by both domestic as well as foreign companies. Though the names suggest that they are set up for SMEs, these exchanges hardly follow the definition of SMEs in their respective jurisdictions. Also, many of them follow a Sponsor-supervised" market model, where sponsors or nominated advisors decide if the listing applicant is suitable to be listed or not; i.e., generally no quantitative entry criteria like track record on profitability or minimum paid up capital or net worth etc are specified to be listed in these exchanges. Instead, they are designed as “buyers beware” markets for informed investors. SEBI has also designed the SME exchanges in a similar format with provisions for market making for the specified securities listed on the SME exchange.

As is the case globally, certain relaxations are also provided to the issuers whose securities are listed on SME exchange in comparison to the listing requirements in Main Board, which inter-alia include, publication of financial results on “half yearly basis”, instead of “quarterly basis”, making it available on their website rather than publishing it, option of sending a statement containing the salient features of all the documents instead of sending a full Annual Report, no continuous requirement of minimum number of shareholders though at the time of IPO there needs to be a minimum of 50 investors etc. The existing eligibility norms like track record on profits, net worth /net tangible assets conditions etc. have been fully relaxed for SMEs as is the case globally. However, no compromise has been made to corporate governance norms.

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