Stay away till the market matures

Last Updated: Wed, Sep 19, 2012 10:47 hrs
Commuters walk past the BSE building in Mumbai

Thejo Engineering, that listed on the National Stock Exchange's (NSE) SME platform (Emerge), is the eighth listed company from the small and medium enterprise (SME) sector. Others like BCB Finance, Jupiter Infomedia, Monarch Healthcare and Jointeca Education are listed on the Bombay Stock Exchange (BSE).

According to BSE data most of these stocks have been trading around their issue price. For instance, the traded price of SRG Housing Finance (listed on September 11) stands at Rs 20.75 as against the issue price of Rs 20.

Similarly, Monarch Healthcare's (listed on May 30) last traded price is Rs 42 as opposed to the issue price of Rs 40. Good part: Your money is not lost, but you've not gained anything on the investment.

Though on a different platform, the procedure to invest in SME stocks is the same as any other stock. You need a dematerialised account for it and you can place your order with a broker. What makes a case for investment in SME stocks is that this sector is the backbone of most developed economies. Venture capitalists have investments in these companies and high growth prospects of small enterprises. If these companies succeed they can give returns more than that of the frontline stocks. But, there is an equal amount of risk involved.

To keep a check on risks, the market regulator has ensured that individuals neither take huge exposure in these companies, nor get stuck with their investment. First, it has put a minimum investment cap of Rs 1 lakh or more. Typically, high net worth individuals (HNIs), institutional investors and banks will qualify to subscribe for initial public offerings (IPOs) or play in the secondary market. Not many individual investors will be able to invest in this sector. SME issues will be 100 per cent underwritten, which means the issues will be fully subscribed or won't fail.

Brokers say there is no dearth of investors in the primary market, but finding buyers in the secondary market could be a problem. To help investors, the Securities and Exchange Board of India (Sebi) has made market making compulsory in these scrips for three years. This means the issue's merchant banker is obliged to find you a buyer and vice versa or buy the stocks itself.

To encourage holding for long, NSE has changed the trading time for SME issues. When listing, a company may either opt for call auction (trading for limited time) or continuous auction.

For example, the NSE's trading time would be 11 am to 11.30 am under call option while trading will happen through out the normal trading hours (9.15 am to 3.30 pm) for the continuous option. In case of call auction, not everyone will be able to sell in the short window provided. This also means little liquidity.

Market experts are not very enthused about the prospects of these stocks.

Says Arun Kejriwal of Kejriwal Research and Investment Services, "Individuals should tread this path only if they can take informed investment decisions. I suggest the investment horizon should be at least three years because liquidity in these stocks can be a problem inspite of market making."

Like, only 2,100 shares of Thejo Engineering traded today (under call auction). Also, of the seven SME stocks listed on BSE three have not traded in the last two trading sessions.

There are some additional factors you need to keep in mind. As the name implies, the companies in this sector are in their early stages of operations. Most investors may not understand the sector and the challenges involved.

Being small-sized companies there is a risk of these going bust as funding is an issue. There is no track record of these companies and chances of these companies not succeeding are also big. There is a dearth of information on these companies as analysts also don't track them.

There is ambiguity around small business models. "Very small and medium sized companies have a long time to go before their business models get validated," says Jagannadham Thunuguntla, strategist & head of research at SMC Global Securities.

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