Sucheta Dalal :BSE to breathe new life into small companies--Divvya Bhaskar
Sucheta Dalal

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BSE to breathe new life into small companies--Divvya Bhaskar  

October 6, 2003

This column about the implications of BSE's new trading segment for small companies appread in Divvya Bhaskar (in Gujarti) on 6 Oct.2003.


BSE to breathe new life into small companies


By Sucheta Dalal



For several years now, we have witnessed the slow demise of regional stock exchanges. We have also observed the relatively recent phenomenon of blue chip multi-national companies delisting from Indian stock exchanges, depriving investors of good investment opportunities. Finally, after many companies raised money in the boom of 1994-96 and vanished, the regulators made it far more difficult for small companies to access public funds.

All these were an inevitable outcome of a liberalised economy where only the fittest survive. What was happening in India was also part of a global trend; a small difference was that Indian bourses failed to react to the changing business environment as swiftly as they should have.

But current international developments in capital market suggest that we are in the middle of another round of structural changes, which may affect us in the near future. These changes are mainly a fallout of the rash of corporate scandals that exposed the most reputed American companies and the controversies that recently engulfed the New York Stock Exchange (NYSE) and the American Stock Exchange.

Last week Forbes magazine said that one of the “unintended consequences” of the regulatory reform brought about by the Sarbanes-Oxley Act was that many small companies were exiting the national securities exchanges. The high cost of complying with the regulatory requirements (estimated at $250,000 to $300,000 per company) was driving them out of the main bourses. The shares of such companies then get pushed to the more unsafe bulletin boards and electronic trading systems that are increasingly popular in America among large and small investors. The fact that small companies and their shareholders are hurt by the new compliance requirements is also beginning to worry the regulators.

The alternative trading systems such as Island and Liquidnet, which are giving national markets like the NYSE and Nasdaq tough competition, are by themselves an interesting new trend. Many of them started out to provide liquidity to thinly traded small stocks, but have instead turned more popular with institutional investors to trade large companies such as General Electric and Boeing. The alternative networks offer anonymous negotiated trades allowing institutional investors to trade large quantities without a major price volatility that would occur on the big bourses.  On such system, Liquidnet has as many as 196 institutions signed up with it.

Both these developments are significant in the Indian context. They suggest that instead of lamenting about the loss of business, Indian stock exchanges can reinvent themselves for another significant innings with enterprise, innovation and imagination.

So far, only the Bombay Stock Exchange (BSE) has made a move to break away from the past and identify new markets.

In a proposal that has been cleared by its board and is yet to be approved by the market regulator, the BSE plans an interesting scheme to list shares of small companies under a separate trading segment, which will have its own set of checks and balances. 

In addition to following SEBI’s (Securities and Exchange Board of India) IPO rules, these companies would have a minimum post issue capital of Rs three crore, a turnover of Rs three crore and be profitable in the previous three years and clear a due-diligence by a stock exchange appointed independent team.  There is also a minimum shareholding rule of 500 and some alternatives to the listing conditions.

The BSE’s proposal will have to clear three stages.  It may be put before SEBI’s primary market advisory committee. It may need approval by the Central Listing Authority and SEBI too could impose some conditions to ensure proper regulation and supervision of the segment.

How is the BSE move to create a small-cap segment important for investors? Even in America, Forbes magazine says, “only 12 % of the 4,748 publicly-traded companies below a  $100 million in market value get any research coverage”, while 86% of those above $100 million are regularly tracked by research firms. It says, this lack of recognition, “ limits a firm's ability both to raise equity and find new investors”.

In India too, investors are obsessed with just a few hundred companies while thousands of companies listed on the BSE are lost in the clutter. 

Small cap companies are the life-blood of an economy could provide investors with excellent opportunity for an appreciation in investment. As Dr.Manoj Vaish says, companies that pass BSE’s due diligence test will attain  “a national presence” which will help them to raise fresh capital more easily.

To be fair, the proposal to breath new life into small cap companies was originally the brainchild of M.R.Mayya of the Inter-Connected Stock Exchanges of India, who called it IndoNext. However, connecting various disparate exchanges to create a single trading platform has not worked and is far too complicated. The BSE proposal, on the other hand, appears neater and easier to regulate and workable.

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-- Sucheta Dalal