The Securities and Exchange Board of India (SEBI) is expected to introduce sweeping changes in the guidelines for listing of small and medium enterprises (SMEs). These include increasing the lot size to Rs 3-5 lakh and pushing up the track record and market-making requirements to five years each, said exchange and merchant banking sources.
The move comes after the markets regulator warned of significant froth in the segment due to irrational exuberance amid traders and retail investors. Senior SEBI officials recently said that they will come out with stricter proposals for SME listing before the end of the current year.
The markets regulator has been seeking recommendations from the exchanges and merchant bankers in the past few months. As part of the draft consultation paper, sources expect the regulator to bring both exchange eligibility and other criteria on a par with each other.
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“Sometimes smaller companies tend to use the regulatory arbitrage opportunity by listing on one exchange when it doesn’t qualify for the other exchange platform,” said a merchant banking source.
Currently, the two stock exchanges–the BSE and the National Stock Exchange (NSE)–regulate the SME listing process. However, they have separate criterion on their respective platforms–NSE emerge and BSE SME Exchange–except for a common eligibility criteria of having a post paid-up capital of below Rs 25 crore and a track record of three years.
Exchange sources said that they have recommended an increase in the minimum application size to Rs 3-5 lakh from the current Rs 1 lakh, in order to deter retail investors from punting into the micro-companies market. The application size has not been reviewed since its inception in 2012.
The market-making agreement is also expected to be extended to five years from the current three years. Market makers create a market for SME shares by providing two-way quotes for 75% of trading hours from the day of listing. Further, even the requirement of track record may be increased from three years to five.
“Proprietary firms, especially the ones that convert companies right before listing, don’t necessarily have the best track record of audited books. They might have to wait until being able to list,” said another merchant banking source.
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