BSE SME Exchange vs NSE Emerge: which is the better story?

On Tuesday, Amsons Apparels listed after raising Rs 3.25 crore. On a day when the BSE Sensex slid 850 points, the stock lost a fifth of value on debut and closed at Rs 7.95 a share. The fabrics trader’s annual revenue was close to the money it raised at Rs 3.21 crore and it earned a profit Rs 4.25 lakh in 2013-14. Companies such as Amsons are queuing at the BSE Small and Medium Enterprises (SME) Exchange.

Amsons was the 83rd entity to be listed on the bourse, launched in March 2012 and with a market capitalisation that recently touched Rs 10,000 crore before cooling to Rs 8,889 crore. On Thursday, 27 scrips were traded, of which 11 ended with gains. Total turnover was around Rs 10 crore, with about 200 transactions.

A study in contrast is National Stock Exchange’s (NSE’s) Emerge, which commenced operations a few months after BSE SME. This platform has had six listings so far. The total market capitalisation of NSE Emerge is Rs 430 crore. The stock prices on Emerge hardly see any movement. Trading is thin. On Thursday, only one scrip (14,400 shares of Momai Apparels) was traded, for Rs 11.48 lakh. While the wide lead of BSE, which lags on the main board, over its larger rival in this new segment has surprised some, it has also raised questions over whether NSE’s is a sleepy model.

Explanations
BSE attributes its hyperactivity to the groundwork it has done. In response to an email questionnaire, a spokesperson said, “BSE since the inception of its SME Platform has done continuous basis seminars across the country, along with various industrial associations, chambers of commerce, ICAI and ICSI to create awareness among the promoters and their consultants.”

The bourse has also done several rounds of meetings with “promoters and their advisors”. While BSE did not comment on where its rival lost out, it added, “We have done approximately 350 seminars and very effectively tried to present the benefits of listing and the capital market, and this has yielded a positive result and helped us stay ahead of the curve.”

NSE maintains it is focusing on building a credible funding platform and creating more awareness among entrepreneurs. Ravi Varanasi, its chief of business development, said: “NSE is keen on encouraging quality SMEs to use the platform to raise risk capital from the market, with a view to establish a credible platform for SME funding.\”

Varanasi added the bourse was engaging both entrepreneurs and merchant bankers closely and that “creation of such a robust fund raising platform does take some time.” But, we are committed to providing an alternative to the felt gap in the fundraising by SMEs, he added.

One parameter that can be comforting for NSE is the amount of capital raised. While the 83 companies on BSE have raised Rs 670 crore, the six on NSE have raised Rs 116 crore. That puts the average capital raised by the Emerge firms at Rs 19.3 crore, more than double the Rs 8.07 crore the average BSE SME company raised.

Some market participants attribute the lead to the headstart for BSE’s platform. Mahavir Lunawat, managing director, Pantomath Advisory Services, a merchant banker which has listed companies on both BSE and NSE platforms, noted the former started in March 2012. “By the time NSE launched its platform towards the end of the year, BSE had already done a certain amount of work, internally and externally.” BSE had initially appointed a former Indian Police Service officer turned executive, Lakshman Gugulothu, as chief executive. He did several roadshows across the country before moving out.

Lunawat, who has had stints in the Reliance group and ITC before turning entrepreneur, also suggested the call option mechanism, which NSE’s first Initial Public Offer (IPO), of Thejo Engineering, followed was not appreciated by market participants. He added NSE took a long time in putting out its operational norms concerning migration of companies to the main board, etc.

Thejo Engineering is now valued at Rs 68.7 crore on Emerge and reported a profit after tax of Rs 8.7 crore, higher than the combined profits of the top six entities by market capitalisation on the BSE SME. Eco Friendly Food Processing, GCM Securities, Esteem Bio Organic, Channel Nine, HPC Bio Sciences and Sunstar Realty clocked a combined profit of Rs 5.2 crore but were worth a little over Rs 7,000 crore.

Kolkata-based Guiness Corporate Advisory and Guiness Merchant Bankers, which has acted as a merchant banker for five of these issues, faced regulatory action recently. In March 2014, Sebi had imposed a fine of Rs 90 lakh on members of the Kothari family which promoted the Guiness group of firms for off-market deals that violated the takeover norms in Kwality Credit and Leasing, a company listed on the main board. GCM Securities, the sixth firm which itself was a Kolkata-based stockbroker, famously floated another IPO of its subsidiary, GCM Commodities & Derivatives, in July 2013 on the BSE SME bourse ,to raise funds to invest in products of the now defunct National Spot Exchange.

Significance
Such details allow NSE to take the higher moral ground of “quality.” But Lunawat, who has worked on a dozen issues, feels the huge gap between the two exchanges might not be a significant factor. He feels the price movement of a few companies should not be overstated. “That might not be the complete picture. We have gone for (listing of) manufacturing companies. For example, we have listed Ultracab, which has a turnover of Rs 30 crore. We are in the process of listing an aquaculture company with a turnover of Rs 100 crore and in talks with another company with a Rs 350 crore turnover.”

The revenue and profit numbers of Emerge–listed firms are slightly better. While Opal reported the lowest profit number of Rs 48 lakh among the Emerge companies, at least two of the top valued firms on BSE SME, GCM Securities and Channel Nine Entertainment had annual profits of less than Rs 10 lakh. Yet, the market capitalisation of these companies have raced far ahead, due to the dizzying run in prices. Both GCM and Channel Nine were valued over Rs 1,000 crore each.

Supporters of the BSE model note that even in the main board, a few companies account for the bulk of the value. A former regulator, who played a key role in the formation of the framework for SME bourses, said the price-earnings ratio can be an important indicator. “When the PE ratio gets into unjustifiable numbers, it is normally advised that the bourse should ask the company if there was any unpublished information that is leading to the spike in prices.”

He expressed concern that the platform should not fall in the wrong hands. “The SME exchange is an important platform, devised to help the development of the country. The race for numbers should not lead to crooks taking over the platform. ”

Ahead
Some bad apples can bring a bad name to the entire basket, says Pavan Vijay, managing director, Corporate Professionals, a Delhi-based merchant banker which has not done any SME business. According to Vijay, three kinds of companies come for listing. First, ones that want to raise money; second, those that want the listed company tag and are not interested in the money and, third, which come for managing taxes. “It is up to the merchant banker and the exchange to decide what kind of companies they bring to the market,” he said.

Under the SME framework, companies do not file their prospectuses with the Securities and Exchange Board of India (Sebi), leaving a lot of discretion with the exchanges.

BSE said it had received a few investor complaints but raised concerns about the latter’s genuineness. “While working to resolve these queries in association with the complainant, we have understood that most of the complaints don’t seem to have given a correct physical address or mobile numbers. Emails sent to complainants are also not replied to and the investor doesn’t seem to be interested in resolving the query,” a spokesperson said.

Lunawat of Pantomath, who is on the Sebi committee on SME exchanges, listed some areas such as the high ticket size of Rs 1 lakh and the market making mechanism as needing the regulator’s attention. The move to launch an institutional trading platform that allowed small firms to list without IPOs is also seen as a hindrance to the growth of SME bourses.

The BSE spokesperson said efforts such as introducing e-IPO, “which will cut various unnecessary costs and processes and make things smoother and faster”, are on. Varanasi of NSE also sounded hopeful. “We see momentum building in this area and expect quality listings to happen in the coming quarter,” he said.

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