BSE, NSE gear up to launch SME trading

In the first three years, there will be a market maker for a public issue, who will support the sustenance of the public offer by providing a two-way quote. Practically, he will hold a certain number of shares of a particular SME and facilitate trading in that security. After a buy order is received, he will immediately sell from its own inventory or seek an offsetting order. This process will facilitate transactions in SME securities and provide liquidity to the securities. However, for SMEs, this will not come free of cost. A fee will be charged by the market makers, increasing the cost of raising equity.

"We have submitted details of at least three companies with a exchange. But, since the IPOs of these companies are as small as Rs 50,00,000-Rs 100,00,000, exchange officials are not giving details about the various costs involved," said a consultant.

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The consultant believes both exchanges have their particular sets of investment bankers and they guide accordingly, when approached. Unlike IPOs of larger companies, Sebi has put the onus of clearing IPOs of SMEs on the exchanges. Small companies directly come in contact with BSE and NSE when they conduct awareness programmes in various towns and cities.

"While one exchange says the entire expense of an issue could be around 8-10 per cent of the entire money raised, the other gives some different calculations. Also, in many cases, the exchanges are initially not willing to look at companies having a very small fund requirement. They want companies which want to raise at least Rs 5 crore, so that cost and other issues can be worked out," said a Mumbai-based merchant banker.

Also, there are other fees relating to underwriting and sub-underwriting of the issue. An investment banker will underwrite 15 per cent of the issue using his own resource and can bring external investors to underwrite the remaining 85 per cent of the issue. This is another area of concern.

According to NSE officials, the cost could depend on how merchant bankers want to charge their clients. Still, they are planning to address the issue of market-making by introducing a 'call auction mechanism.' Under this, the NSE would not stipulate continuous trading sessions for the entire day, but for a few minutes on regular intervals.

"Call auction could bring down the cost of market making. It is like the pre-opening session of the main market. We are creating a proper ecosystem to address cost issues," said an NSE official.

Most exchange officials say they would like to start with companies which look are promising and show growth potential, which is why they would not back companies which are too small.