Framework for SME Exchange

After making a proposal nearly two years ago for the establishment of a separate stock exchange for small and medium enterprises (SMEs) to enable them to access the capital markets, SEBI has recently established the legal framework for achieving the same either through promotion of dedicated exchanges and/or dedicated platforms of the exchanges for listing and trading of securities issued by SME. SEBI has taken the following steps:
1. Introduced Chapter XA in the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 which deals with issue of specified securities by SMEs;
2. Prescribed a format of the listing agreement to be entered into between the SME issuer and the concerned stock exchange. As the SEBI circular issuing the model listing agreement states, there are certain relaxations provided to SME issuers in comparison with main board listed companies, which are as follows:
a. Companies listed on the SME exchange may send to their shareholders, a statement containing the salient features of all the documents, as prescribed in sub-clause (iv) of clause (b) of proviso to section 219 of the Companies Act, 1956, instead of sending a full Annual Report;
b. Periodical financial results may be submitted on “half yearly basis”, instead of “quarterly basis” and
c. SMEs need not publish their financial results, as required in the Main Board and can make it available on their website.
3. Amended the policy framework for SME listing through a circular that is in addition to the framework previously announced by SEBI.
As I had previously noted:
Overall, this is a welcome move as it could potentially create financing avenues for SMEs and also a separate market for investors keen to target that segment of the economy. This is also in tune with the international trend as we have seen earlier. However, it also calls for some caution and pessimism, particularly in view of past attempts which have failed. The prime attempt relates to the establishment of the OTC Exchange of India (OTCEI), which has not garnered the attention of the SME segment as it was expected to. Recent reports and commentaries have pointed to the need to ensure that this is not repeated with the current attempt (see, LiveMint and Mostly Economics blog).

From a legal and regulatory standpoint, it is likely to be more difficult to control the activities of SMEs as they may not have adequate infrastructure to meet with the required audit, reporting and compliance procedures as compared to the larger more established corporates. The reputation incentives of SMEs to comply with listing requirements and corporate governance may not be as high as their larger counterparts. …

In essence, there is a need to guard against a “race to the bottom”.

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

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