Capital Market Accessibility for Small and Medium
Title
Enterprises: Reflections on Alternative Investment Market
Model in India
Suggested
Theme
Economy: Financial Inclusion and Deepening
37th Skoch Summit, 21 st Thinkers and Writers
Submitted To
Forum, “Minimum Government, Maximum
Governance”
Author
Dr. Darshana Padia, Assistant Professor
Institution
H L Institute of Commerce, Ahmedabad University
Mobile
Contact
Details
E-mail
Official
Address
+91 99 25 78 73 32
darshana.padia@ahduni.edu.in,
darshana.padia@gmail.com
H L Institute of Commerce, Ahmedabad
University, Navarangpura, Ahmedabad
380009
ABSTRACT
This paper discusses how the existing primary capital markets are designed to adhere
to the need of big firms and how they create impediments for small firms. SEBI has
created various substructures within the primary capital market for the small and
medium sized firms to avail these markets. There are Small and Medium Enterprise
(SME) Platform, Over-The-Counter Exchange of India (OTCEI) and Alternative
Investment Funds (AIF). All these are regulated and streamlined under the primary
capital market and have gradually developed over a period of time to make capital
markets more inclusive. However, there exists complexities in time, structuring and
listing of securities resulting in less or non-accessibility of potential funds for small or
medium enterprises. The paper attempts to compare and contrast these various
substructures created by SEBI and the major impediments thereof. The paper also
briefly looks up the functioning of Alternative Investment Market (AIM) of London and
attempts to list a few important lessons from the same.
1
Capital Market Accessibility for Small and Medium Enterprises: Reflections on
Alternative Investment Market Model in India
Introduction
Capital markets are an essential mechanism to create a favorable financial climate that
boosts economic development. There are two important dimensions that have to be
carefully scrutinized to keep the growth momentum going:
1) The way capital markets are formed, regulated and monitored and
2) The ways to access these capital markets
The role of capital market lies in mobilization of savings, regulating of funds, capital
formation, providing investment alternatives, speed up economic growth and
development, deliver financial services and ensure continuous flow of funds between
Savings, Consumption and Investment in any economy. In India, Securities and
Exchange Board of India (SEBI) is the regulatory authority for capital markets and it
is quasi-legislative, quasi-executive and quasi-judicial. It means it enacts legislations,
conducts investigations and enforces actions. There are regulatory norms through
which companies get listed in the securities market and can avail the benefit of raising
the finance fairly and easily. Listing broadly means admission of ‘Securities’ of a
company on a recognized stock exchange. The purpose of listing is different for
different parties. A company lists its securities to avail liquidity from the market, an
investor is interested in listed securities as it ensures transparency through full
disclosures and the government will aim to regulate securities market by listing so as to
mobilize savings for economic development. (BSE, 2014). Currently in India the main
capital markets exist in terms of stock exchanges where securities of specific types and
sizes are traded. SEBI does this through creation of companies, charters or vehicles. To
avail the benefit of capital markets there are minimum listing requirements in terms of
paid-up capital, market capitalization, track record, and issue sizes.
Rationale
This paper discusses how the existing primary capital markets are designed to adhere
to the need of big firms and how they create impediments for small firms. SEBI has
created various substructures within the primary capital market for the small and
2
medium sized firms to avail these markets. There are Small and Medium Enterprise
(SME) Platform, Over-The-Counter Exchange of India (OTCEI) and Alternative
Investment Funds (AIF). All these are regulated and streamlined under the primary
capital market and have gradually developed over a period of time to make capital
markets more inclusive. However, there exists complexities in time, structuring and
listing of securities resulting in less or non-accessibility of potential funds for small or
medium enterprises. The paper attempts to compare and contrast these various
substructures created by SEBI and the major impediments thereof. The paper also
briefly looks up the functioning of Alternative Investment Market (AIM) of London and
attempts to list a few important lessons from the same.
Capital market and its importance
The under given figure 1 displays the number of Demat accounts in the country
reflecting the number of prevailing investors. It also shows the number of listed
companies that were able to avail the benefit of the capital markets and reflects the
amount of the total financial resources mobilized in the economy.
Fig. 1
Demat Accounts (in lakh)
Year
NSDL CDSL
2011-12 120.5 79.0
2012-13 126.9 83.3
2013-14 130.6 87.8
No. of Listed Companies
Year
NSE BSE
MCX-SX
20111,646 5,133
NA
12
20121,666 5,211
0
13
20131,688 5,336
12
14
Resource Mobilization through
Public and Right Issues
Particulars
2012-13
No. of Amount
Issues (Rs.
Crore)
Public Issue
53
23,510
Right Issue
16
8,945
Total Equity and Bond
69
32,455
Total
6,779
6,878
7,036
2013-14
No. of Amount
Issues (Rs.
Crore)
75
51,075
15
4,756
90
55,652
Source: http://www.sebi.gov.in/cms/sebi_data/attachdocs/1408513411215.pdf
The figure shows that there has been a steady increase in the number of Demat
accounts and the number of listed companies. However, the number of increase in
listing has only risen by 2 percent as compared to the growth of investors by 4 percent.
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It shows that in 2013-14, 90 companies accessed the primary market and raised Rs.
55,652 crore through public and rights issues as against 69 companies which raised Rs.
32,455 crore in 2012-13. There has been a significant increase of 30 percent in fund
mobilization in just one year. The noteworthy point is that though the number of Initial
Public Offer (IPO) in 2013-14 rose to 38 from 33 in the year 2012-13, the amount raised
drastically slumped to Rs. 1,236 crores in 2013-14 as against Rs. 6,528 in 2012-13.
Another important highlight is that, out of the 38 IPOs, 37 were listed at the SME
platform of SEBI. (SEBI Annual Report 2013-14). This indicates that number of SMEs
are trying to tap the mainstream capital market but are unable to realize its full potential.
This is a significant indicator as it demonstrates that SEBIs SME platform is not able to
provide sustainable funding options to deserving SMEs.
The SME Platform
In 2013-14, 37 issues were listed at the SME platform raising a total amount of Rs. 317
crore as compared to Rs. 239 crore raised through 24 issues in the 2012-13, indicating
an increase in resource mobilization to the tune of 32.6 percent. The major advantage
of SME platform is that start-ups and SMEs can get listed without making an IPO.
(SEBI Annual Report 2013-14). The importance of SME platform and its limitations can
be fully understood in light of the projection of number of SMEs and the value of its
assets in MSME Report, 2013-14. Figure 2 shows projected performance of SSI/MSME
in terms of growth in number of SMEs and the investment needed.
Fig. 2
Projected Performance of
SSI/MSME
480
1,300,000.00
1,250,000.00
1,200,000.00
1,150,000.00
1,100,000.00
1,050,000.00
1,000,000.00
460
440
420
400
2010-11
2011-12
Total Working Enterprises (in Lakh)
2012-13
Market Value of Fixed Assets (Rs. in Crore)
Source: Annual Report 2013-14, MSME, GOI, New Delhi
It can be seen that the need of funding is growing. As per the Central Statistical Office
(CSO), India’s Gross Domestic Savings as a percentage of GDP at market prices has
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gone down to 30 percent in 2012-13 from 31 percent in 2011-12. Due to inflation, there
has been a decrease in Private corporate savings and Household savings in terms of
physical assets. Considering mobilization of financial savings impacted by low deposit
rates there ought to have been more flow of funds in financial markets. There was no
change in Public sector savings and the percentage of investment declined to 34.8
percent in 2012-13 from 35.5 percent in 2011-12. (SEBI Annual Report 2013-14).
Viewing both the facts i.e. growing fund requirements of SMEs and decreasing savings
in an inflationary trend in the economy, SME platform needs to be dismantled from the
SEBI. There is a need to restructure it in terms of a flexibility, timeliness, size and
number of issues, market capitalization, type of investors, nature of funds in terms of
equity and debt, and liquidity.
Over-The-Counter Market
The number of listed companies on OTCEI Exchange was 60 as on March 31, 2013. It
is yet another type of exchange created to cater to the funding needs of small
companies. It exists as a Company form of organization and is mainly promoted by
government or semi government Financial Institutions. The major limitation of OTC is
that its promoters have been listed as sponsor members and hence only they can list
companies. It is more of a ‘floor-less exchange’, an ICT based market which allows the
dealers to quote, query & transact through a central OTC network. (OTCEI Report).
OTCEI is intended to provide easy marketability and better liquidity of securities to an
investor. There is total transparency and fairness so far as the deals are concerned. It
takes lesser time to finalize a deal too. However despite being in existence for a number
of years, the exchange has not had a major presence amongst stock exchanges of
India.
Alternative Investment Funds
Considering the limitations of SME platform, SEBI created a class of pooled-in
investment vehicle called Alternative Investment Funds (AFI) for real estate, private
equity and hedge funds in May 2012. The investing mainly happens as a pre-decided
policy under this intermediator. These are divided in three categories.
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Category I gets incentives from the government, SEBI or any other regulator and
includes Social Venture Funds, Infrastructure Funds, Venture Capital Funds (VCF) and
SME Funds. These have positive spillover effects on the economy and are socially
desirable. Category II AIFs do not have any regulatory incentives and have more
freedom in terms of investment because funds can be raised anywhere and in any
combination. However it cannot raise debt except for the day-to-day needs. It includes
Private Equity Funds and Debt Funds. Category III are the short term return focused
AFIs like hedge funds, PE funds, debt funds or fund of funds. These use leverage and
complex trading strategies and have negative externalities. The cumulative amount
mobilized by AIFs as at the end of 31st March 2014 across all the three categories as
Fund raised was 4,569 crores and Investments made out of this were 3,348 crores. This
exhibits that in a very short period AIFs have become a popular tool not only for the
companies but also for the investors. (The Hindu. 2013).
As of March 31, 2014, there were 101 AIFs registered with SEBI. They currently are
regulated as per the SEBI (VCF) Regulations, 1996 and SEBI (FVCI) Regulations,
2000. The SEBI (AIF) Regulations, 2012, subsumes VCF and FVCF from the same.
This means that AIFs scope and purpose are yet not fully functional because it currently
falls as a substructure under the main capital market.
Fig. 3
Category
Corporate/
Institutions/Others
FVCIs
Individuals
NRIs
Total
Category wise investors in VCFs
Number of Percentage Cumulative
Percentage
investors
investors
investments
investments
(Rs. crore)
4,675
10.2
25,130
46.8
28
40,955
47
45,705
0.1
89.6
0.1
100.0
16,437
12,073
25
53,665
30.6
22.5
0.0
100.0
Source: SEBI Report
The investor profile shows that 89.6 percent of the total numbers of investors in existing
VCFs are individuals. Their cumulative investments comprise 22.5 percent of the total
cumulative investments. Corporate/Institutional investors accounted for 10.2 percent of
the total number of investors but contributed 46.8 percent of the total cumulative
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investments. This means that individual investors have half as much capacity to invest
as institutions. These can be a good source for local capital markets, if there exists a
fund market where individuals can decide on the investment potential of small
companies. FVCIs only comprised a miniscule percent of the total number, but their
corresponding investments accounted for significant 30.6 percent of the cumulative
investment. This indicates that a similar interest of FVCIs can be created in small fund
markets too.
Scope of Modification
From the above analysis, there emerge three major problems:
a. SEBI has been using number of vehicles like SME platform, OTCEI and AIFs to
replicate the mainstream capital market mechanism of investments in the
markets with smaller fund requirements. The major problem is that, as it is
regulated to a large extent, it is not a fully flexible market on its own.
b. The major purpose of AIM is to simplify the process of listing, widen the
accessibility of funds, mobilize investment easily between the investors and small
enterprises, and yet make it transparent. This is not reflected in AIFs in India.
c. Small and medium sized companies, enterprises in the unorganized sector,
lending in priority sector and emerging enterprises/new enterprises find it
extremely difficult to access and tap national capital markets. This is due to
statutory requirements for listing in terms of time and cost being very high.
To address the above listed problems, there exists a structure called Alternative
Investment Market. It has been widely used by the UK to channel institutional investor
funds to new and upcoming small organizations.
Alternative Investment Market
Not all business organizations need investments that are large, and hence to undergo
the minimum requirement for listing securities as per the SEBI guidelines for the primary
capital market may not be feasible. Not only do the small and medium sized firms have
small funding needs, but the lengthy and costly process of listing of securities also may
not be favorable for them. Hence AIM which has flexible regulatory system is more
feasible.
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Major objective of AIM is to promote the early stage companies, which may seek funds
through Venture Capital (VC). New firms will not be able to otherwise generate funds
from open markets due to limited or nonexistent track record. In the period of recession
many companies may need to leave the market due to unavailability of funds and low
investor confidence. AIM will be a good option at such times as it will be able to cater to
smaller financial needs of investors as well as companies.
For better considering these aspects, a pertinent example will be of The London’s AIM
which has been able to propel growth rate in stock prices and register a return of
approx. 27 percent in the last year. (David Prosser, 2014). London’s AIM started in 1995
and is fast become market of choice for small companies that want to grow not only in
Europe but across the globe. The AIM mechanism works for both investors and SMEs.
For investors due to the tax breaks and its option to invest in a small fund sizes, and for
SMEs due to lesser regulatory requirements and cheaper cost of capital. Considering
the introduction of AFIs only as recently as May 2012, Figure 4 displays that there has
been a double jump in growth of AIFs.
Fig.4
Number of Types of Fund
Particulars 2012-13 2013-14
VCFs
211
207
FVCIs
182
192
AIFs
42
101
Source: SEBI Report
There has been a considerable increase in FVCIs, which highlights that foreign
investors found Indian capital market more favorable as compared to VCFs in India. The
decrease in VCFs also indicates change in the investment patterns in primary markets.
Suggestions
Taking into consideration these three problems, following suggestions are made:
1. To make financial markets friendlier for SMEs the procedures can be reduced
and yet to secure investors, AIM markets can be regulated by having Nominated
Advisors, who will assess the companies seeking funds. It has to be a selfregulated market. However this should not happen at the cost of investors’
money. Hence to avail the flexibility in trading, a company will necessarily need
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to go through various stipulated process in a given market. This implies that AIM
can vary offers from market to market depending upon the prevalent local
business environment. Depending on the local prevalent practices, a company
may be differently assessed on the basis of size, turnover, track record or
minimum shares offered to public or margin requirement. Investors in the
particular local market will themselves decide the benchmarks for lending and
these may vary from market to market. This would mainly depend upon the risk
bearing capacity of the investors and the bargaining capacity of the fund seekers.
2. In the USA AIM has institutional investors with an ability to take informed and
calculated risk in emerging businesses. In the UK AIM has become a major
alternative to venture capital. In India, the percentage of individual investors in
primary capital markets is high. (SEBI Annual Report 2013-14). Considering the
US accessing the European AIMs, an American company getting funds in
European market reflects upon the credibility of the company. If a similar type of
scenario can be created in India, where Indian companies can go out and get
funds and foreign companies can come to Indian market to obtain funds, then it
enhances credibility both ways. The usefulness of this can be fully understood
when we consider that currently India is not part of any major Trading Block in
the world, when it comes to MNCs there are just a handful of Indian companies
that qualify for world trade and the trade relations that we have across all our
neighbors is highly influenced by political environment. In case of developed
nations, it is the other way round, where the economic or trade relations are used
to create political pressure.
Out
of
approx.
30
different
trade
blocs
in
the
world
currently
(http://www.eepcindia.org/trade-blocks.asp), India is part of Bangkok Agreement,
GSTP, and Tripartite agreement which do not provide substantive import-export
options with the developed economies. Moreover apart from China, these trade
blocs are with small emerging economies. The RCEP negotiations are about to
come to a closure in 2015 and will throw up opportunities for India to ASEAN
nations as well as six nations under existing FTA. This will bring about huge
trade opportunities for Medium to Large Scale Organizations. The major barrier
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would be accessibility to capital by these firms at that time. An AIM with
functional flexibility just like the London AIM would be able to help mobilize and
rotate the funds faster in such scenario for India. (EEPC, n.d.)
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Abbreviations
AFI
Alternative Investment Funds
AIF
Alternative Investment Funds
AIM
Alternative Investment Market
ASEAN
Association of Southeast Asian Nations
BSE
Bombay Stock Exchange
CSO
Central Statistical Office
EEPC
Engineering Export Promotion Council
FTA
Free Trade Agreement
FVCI
Foreign Venture Capital Investor
GDP
Gross Domestic Product
GSTP
Global System of Trade Preferences
ICT
Information Communication Technology
IPO
Initial Public Offer
MNC
Multinational Company
MSME
Micro Small and Medium Enterprises
NRI
Non-resident Indian
OTC
Over-The-Counter
OTCEI
Over-The-Counter Exchange of India
RCEP
Regional Comprehensive Economic Partnership
SEBI
Securities and Exchange Board of India
SME
Small and Medium Enterprise
SSI
Small Scale Industry
VCF
Venture Capital Funds
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Reference List
Annual Report. 2013-14. Ministry of Micro, Small and Medium Enterprises. Udyog
Bhavan, New Delhi. Retrieved from:
http://msme.gov.in/WriteReadData/DocumentFile/ANNUALREPORT-MSME-201314P.pdf
Annual Report. 2013-14. Securities and Exchange Board of India (SEBI). Retrieved
from: http://www.sebi.gov.in/cms/sebi_data/attachdocs/1408513411215.pdf
BSE, (2014). Guidelines for Company Listing. Retrieved from:
http://www.bseindia.com/Static/about/listsec.aspx?expandable=2
Engineering Export Promotion Council (EEPC), Ministry of Commerce & Industry,
Government of India. Retrieved from: http://www.eepcindia.org/
Financial Results (Directors’ Report) of OTCEI. March 2013. Retrieved from:
http://www.otcei.net/fact/
Prosser, David (April, 2014). The Top 10 IPOs On Britain's Alternative Investment
Market. Entrepreneurs. Forbes. Retrieved from:
http://www.forbes.com/sites/davidprosser/2014/04/04/the-top-10-ipos-on-aim/
The Hindu. August 27, 2013. SEBI allows 73 AIFs to operate in India. Retrieved from:
http://www.thehindu.com/business/Economy/sebi-allows-73-aifs-to-operate-inindia/article5064993.ece
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