In recent weeks, a lot of market participants and commentators have expressed concern about the rising household (retail) investors’ interest in the SME segment of the Indian stock market. It has been highlighted that most of the businesses being listed on this platform may not be genuine and/or sustainable. The regulators have also expressed apprehensions about the widespread manipulation in the prices of several SME stocks. A 400x oversubscription to the recent Rs120mn IPO of a motorcycle dealership in Delhi has provided further impetus to the discussions on this topic.
There are demands that the criteria for listing on SME segments must be tightened and there should be deeper scrutiny of the companies proposing to list on this segment. The regulator, SEBI, is considering these demands and intends to prescribe stricter rules for the SME listings.
In this context it is pertinent to note the following points.
1. As part of the broader capital market reforms, which included abolition of capital controls and establishment of an autonomous market regulator (SEBI), the Over-the-Counter Exchange of India (OTCEI) was established in 1990. OTCEI was modeled after the NASDAQ trading platform of the US and meant to provide small and medium sized enterprises (SME) a fully automated national platform for raising risk capital.
A number of SME promoters used this platform to raise money in the 1990s. However, the experiment was considered a failure as the listing process lacked adequate scrutiny and ingenious promoters were able to raise money at unsustainable valuations. A majority of the companies that raised money on OTCEI vanished, inflicting substantial losses to the investors.
2. In the mid-1990s there were 29 recognized stock exchanges in India. The 28 regional stock exchanges (RSEs) helped the local companies to raise risk capital. All these RSEs had floor base trading and physical settlement of securities. A majority of investors in these local companies were also from the same state or region. For example, a company listed only on the Madras Stock Exchange was more likely to have investors from Tamil Nadu as its shareholders, because investors from other regions usually did not have access to the Madras Stock Exchange.
With the advent of the National Stock Exchange (NSE) as a computer based national trading platform, things started to change from 1995 onwards. In a couple of years the Bombay Stock Exchange (BSE) also transformed itself into a computer based national trading platform. Over the next decade and a half, all the RSEs faded into oblivion. Most relevant companies migrated from these RSEs to these two national stock exchanges. But many smaller local companies, listed only on these RSEs, also perished along with them. Not all of those companies were fraudulent. Many of them were just not big enough to qualify for trading on national stock exchanges. Investors in those companies also suffered for a long period; until they made offers to buy back their shares.
The point to ponder over is “did the market participants – regulators, stock exchanges, brokers, investment bankers, investors, etc., - learn any lesson from the OTCEI and RSEs episodes?” To me, prima facie, it appears that the same drama is being played all over again at SME platform; and only the unscrupulous promoters and intermediaries have learnt their lessons from the past failures, and become even more smart.
