Close to five years after the introduction of a separate segment for listing of small and medium enterprises (SMEs), market participants are now looking at ways to increase the liquidity to attract more institutional and retail investors.
With critical mass being attained, market participants are now lobbying hard with the capital market regulator to review the trading norms to increase liquidity in the segment. One of the main issues being proposed is lowering the trading lot size post listing, which is currently pegged at ₹1 lakh.
Minimum lot size refers to the minimum amount that an investor has to put in to trade in the shares of a company.
Separate platforms
The country’s leading equity bourses — BSE and the National Stock Exchange (NSE) — introduced their separate SME platforms in 2012. While both have been pitching their respective platforms to SMEs by way of awareness camps across the country, BSE has marched ahead in terms of numbers of companies. Asia’s oldest stock exchange has seen 165 SMEs listing on its segment, while NSE has close to 60 entities on board so far.
“There is marked improvement in trades in SME stocks, though many a time, concerns over lesser liquidity still take centre-stage in discussions on SME investing,” says Mahavir Lunawat, Group Managing Director, Pantomath Capital, an investment banking entity specialising in the SME space.
“Mitigation of lot size in secondary trades can be explored as a measure to aid liquidity levels. Investors would certainly find it more convenient to deal in SME stocks in small lots. That will also reduce pressure on market makers,” adds Mr. Lunawat.
Merchant bankers are of the view that once the company has been listed for a certain period of time and a trading history has been created, the lot size could be lowered to one share so that retail investors can also participate if they are convinced with the quality and potential of the entity.
SEBI proposal
Incidentally, a formal proposal on behalf of Association of Investment Bankers of India (AIBI), the umbrella body of merchant bankers, is likely to be submitted soon to the Securities and Exchange Board of India (SEBI).
Stock exchanges, however, seem to differ over the issue of lowering the lot size. While NSE favours a reduction in lot size post listing, BSE believes that the current framework has worked well and hence should not be changed.
“SEBI has made the SME guidelines for informed investors and it is working fine. There is no need to disturb the ecosystem at this juncture,” said Ajay Thakur, Head BSE SME.
When SEBI framed the guidelines for the SME segment, it intentionally kept the minimum trading lot at ₹1 lakh to keep out retail investors since the view was that SMEs carry higher risk compared to companies on the main board.
“SEBI has been consulting the market on this issue and reducing the lot size is likely to improve liquidity in securities on the SME platform. It can be considered if the regulator thinks it is appropriate,” said a senior NSE official.
Bankers say that the last five years have shown that there is enough appetite for SME stocks and investors have realised that the segment is for investment and not trading for quick gains.
“Given that most of the SMEs are at the initial trajectory of the business life cycle, investors should have a longer investment horizon. The SME segment should not be perceived to be a trading platform aimed at making immediate returns,” said Mr. Lunawat.
