A candid discussion on India’s failure to create an alternative trading platform for small and medium enterprises (SME), and the admission that IndoNext and the Inter-Connected Stock Exchange (ISE) model have failed, are important features of the report of the committee to study the future of Regional Stock Exchanges (RSEs).
This frank assessment however does not lead to the recommendation of a workable model for SMEs to fill an important gap in India’s capital market infrastructure. The committee has offered two models—one proposed by the Bombay Stock Exchange (BSE) and another by the Inter-Connected Stock Exchange (ISE), but their primary objective is to prolong the life of RSEs rather than to create a new market. This effort to fit RSEs into contrived new structures stems from the finance ministry’s determination to extract a price for the tax concessions granted to bourses over the past decades. This single factor is responsible for keeping RSEs alive through stockbroking subsidiaries, while creating a strong disincentive to fresh thinking on the issue of establishing a much-needed SME market.
Let us first look at the opportunity. According to the report, there are 4,000 companies listed exclusively on RSEs, of which a handful trade actively. However, 500 companies remain fully compliant with listing rules and cannot be delisted or thrown out. These companies clearly languish because they are not listed on the large national bourses. Meanwhile, the Indian banking sector and the maturing venture capital industry has begun to perceive SMEs as the hot new market opportunity. Both sets of financiers would be far more comfortable about lending to these companies if they were publicly traded and offered an exit route to venture financiers.
In January 2005, the finance mini-ster launched IndoNext—a separate trading platform for SMEs under its existing automated trading system. It was a joint initiative with 14 of the 18 members of the Federation of Indian Stock Exchanges. The original idea for such a platform was mooted by the ISE, but it did not have the funds to take on the responsibility of supervision, risk management and monitoring. The BSE accepted initial responsibility to create a single national order book and allow RSE members also to trade on it. A few RSE-listed stocks and smaller BSE companies were transferred to IndoNext. Over time, new SMEs were expected to be listed on this platform. Although 520 companies have been transferred to IndoNext (mainly from the BSE) and daily turnover exceeds Rs 100 crore, the experiment has failed to meet its objective.
• The panel report on RSEs’ future hasn’t offered workable models to proceed
• An SME platform isn’t possible by prolonging the existing RSE structure
• Let the needed national bourse evolve on strictly business considerations
BSE and ISE have now proposed new SME platforms that go beyond IndoNext. The committee recommends that RSEs must choose either model or be derecognised. The BSE model offers regional brokers direct access to its trading platform, including the derivatives segment. It will also permit them to issue their own contract notes. However, the RSEs will remain the common clearing agency with recourse to its settlement guarantee fund. This proposal only threatens to confuse supervisory responsibility and create a nightmare for Sebi’s already stretched investigation resources.
The ISE has sought recognition as a national bourse, with exclusive trading rights to RSE listed shares and new SME companies. It pragmatically offers access to BSE and NSE brokers to fuel liquidity. Ironically, the OTCEI and the RSEs made similar proposals, but the committee says nothing about OTCEI’s future.
Frankly, these are artificial solutions. If the government wants an SME platform, it has to start with a clean slate. This means allowing RSEs to make their own decisions in their best interest. If the decision is dictated by the greed to encash property value, so be it. Let them dispose off their infrastructure (for historical reasons, national bourses may be given first right to acquire these properties as regional centres) and distribute the money among members, if that is what they want. There will then be no reason to coddle the regional brokers by keeping alive the subsidiaries; regional brokers can then become members of national bourses through smaller corporate entities or simply shut shop. It is only then that a viable, national-level SME bourse can evolve on strictly business considerations, either through the ISE platform or the merger of willing and far-sighted RSEs.