A NEW exchange for small and medium sized companies? No way. Size does not dilute the discipline required in the use of public money. We have already seen how creating multiple touchlines — by setting up so many exchanges — is counter-productive. No doubt, SMEs need to have access to funds at an economic and competitive cost. The risks associated with such enterprises are high. In developed markets, wealthy private investors don the mantle of angel investors or venture capitalists. They often sell their stake to private equity (PE) investors once the idea and the business has fructified and achieved a size. PE investors then take the operations to the next level and exit to public investors. It is envisaged, somewhere in between this evolution cycle, that these may be funded by public investors and their holdings should be tradable on the small and mid-cap exchange. Issuance of shares by SMEs to public at large will short-circuit the evolution cycle. Neither investors nor the companies are adequately mature for the relationship. Experience of the OTC exchange is a case in point. The question of creating a stock exchange for SMEs listings presupposes public equity funding is the best financing alternative. But the question is how to fund these and who should fund these? Only after this issue is answered should the question of how the investors may “exit” be explored. Providing of risk equity from aforesaid expert private sources and debt from existing institutions is the most appropriate way to fund SMEs. Securitisation of such debt would make the debt instruments more liquid and also bring own cost of lending. Qualified institutional investors may be asked to invest in IPOs of these SMEs. Creating a separate trading platform for these few investors is not an economically beneficial proposal. The existing exchanges must assume this responsibility. They already have invested large sums in creating and maintaining the infrastructure and now have even demutualised. They should be the first choice. To sum up, no direct public funds for SMEs please. Rather, review and revise the current institutional lending methods and enforce good legal framework for private investment. (* Asit C Mehta Investment Interrmediates Ltd) ANIL BHARDWAJ Secretary General FISME* Will pave the way for raising risk capital WHY do 85% of small enterprises in India not have access to any form of institutional funds? Whom should they turn to for fresh or additional capital, once their personal resources of friends and relatives are exhausted? Why have the waves of venture funds and private equity almost completely bypassed Indian SME sector, the vibrancy of which nobody disputes? Some of the key constraints of the SME sector include its singular reliance on banks for finance, the near complete absence of institutional mechanisms for raising risk capital and strangulation of even alternative financing options such as NBFCs and factoring (without recourse). When it comes to SME financing options, the Indian financial architecture is agonisingly anachronistic — lagging behind the global financial markets by at least 20 years. Throughout the world, it has been realised that bankers are remarkably unimpressed by pro-forma financial statements showing anticipated cash and profit potential of an enterprise and so it is futile to expect risk capital support from them. There is a world-wide trend towards expansion of capital markets and investment listings specially designed to serve the risk capital needs of SMEs. More than 50 SME alternate markets, stock exchanges, boards of trade, lower tier exchanges are thriving across the world. These include AltX of South Africa to Mercato Expandi in Italy. The AltX, for example, has outperformed the major exchange by over four times in an year. An exchange designed for the needs of the Indian SMEs will pave the path for raising risk capital. It will also build the bridge between SMEs and the private equity and venture capital by providing an exit route. Further, public scrutiny of SMEs will improve governance processes and practices. Most of the fears expressed in some quarters about investor interests with reference to an exchange for SMEs are exaggerated. Although the need for suitable regulatory mechanism cannot be overemphasised, yet we should not lose sight of the fact that the investors today are more mature and better informed than their counterparts of 1980s. (* Federation of Indian Micro Small and Medium Enterprises)