Small is beautiful for an Exchange

The most important challenge is liquidity. An India wide phenomenon that is being witnessed is that investors are exiting equities in favour of real estate and gold. The reason being these assets have given better returns.

March 06, 2013 12:09 IST | India Infoline News Service

I recently attended a seminar organised by the National Stock Exchange on Small and Medium Enterprises Exchange. Small and Medium Enterprises are the bedrock of any economy. Even in India, their contribution towards the overall economy is immense. Everybody realizes that flow of capital to SME sector in the form of debt or equity is critical. Yet most SMEs are starved of capital. However, it is not clear why? Is it because they lack corporate governance and hence capital or vice-versa?  

Incidentally, this is the third attempt to launch a small exchange. The first was OTCEI which failed and I remember asking the luminary Dr RH Patil (more than a decade ago) about his view on OTCEI (Read my interaction here).  He said any exchange that is built with a purpose of just taking care of one stakeholder and providing him an exit is bound to fail. IndoNext was the second, which really didn’t take off and now we have the third attempt by both NSE and BSE for SME equity raising.

The theme of our panel discussion was how to attract investors and make the SME exchange a success. There are no simple answers but I will cover some points that can make a difference. I also want to thank my co-panelists and I would welcome suggestions from those of you who read this blog.

The most important challenge is liquidity. An India wide phenomenon that is being witnessed is that investors are exiting equities in favour of real estate and gold. The reason being these assets have given better returns. 

Investors like to chase assets that give good returns. In the last five years, Nifty has not gone anywhere, mid caps have lost value and small caps have become micro caps. As a result, fatigue has set in. Typically, action starts in large caps, once the large cap has run its course then the action shifts to mid-cap and at the end of it all, there is a frenzy in small caps as people (I will not say investors) run head over heels hunting for hidden gems to make a quick buck. The hidden diamond that they picked up often transforms into coal only to burn a hole in their pockets.

I vividly remember the situation in 2007 when most of the HNIs were willing to put money in locked-in schemes, pre-IPO placement, venture funds and so on, knowing very well that their investments would be locked in for a long time. The situation has changed now. Our theme for IIFL Wealth meet this time was ‘See Clearly’ and all the HNIs I meet only seek simple products, moderate returns and high liquidity. No more multi-baggers and concept stocks. In one of my earlier blogs I had mentioned that the so called multi-baggers can make people multi-beggars in the shortest period of time.

So first and foremost, we need a bull market. That unfortunately is in hands of God so let us look at what mere mortals can do.

For the SME exchange to do well, we need good companies to get listed. The moment they are listed and there is performance in terms of quarterly earnings and disclosures, then over time, investors will come. The diligence done by exchanges and bankers is a step in the right direction. Once you have a large universe of stocks listed, chances are high that by simple law of averages you will have a success story. The moment you have a success story, people will start hunting and searching for good ideas in the SME exchange.

The IT boom that we saw once in the late 90s was an outcome of our own domestic success stories like Infosys, which was the IT bellwether.  So if you have even one or two success stories, investors will sooner than later flock in.  And the solid sector became liquid in the stock market (bad joke). Create a SME index so ETFs (another long term good idea) can track.

The media can play a crucial role. We must acknowledge the investor awareness created by media especially CNBC, ET Now and Bloomberg. They have taken stock markets to all corners of the country. Regional languages too show stock market news. The media can have dedicated shows on small exchange stocks. This will generate awareness. In spite of people watching business channels, retail investors have still not come to markets – but that’s another story.

Lastly, one must not be afraid of failure. There will some company that will disappear or prices will collapse. SME space sees very high mortality. This may happen in spite of the noblest efforts of the regulators and exchanges and bankers. Everyone must be educated that to generate higher returns one must be willing to take higher risks. We have to live with the fact that if you keep money on the table, sooner or later thieves will come whether it is Ram Raj or Kalyug. Unfortunately, we live in Kalyug so the thieves might come in much faster.

I will be happy to read your suggestions. Click here to send your feedback

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