In January 2013, the Nairobi Securities Exchange (NSE) launched the Growth Enterprise Market Segment (GEMS), with a view to creating a window for small and medium sized enterprises (SMEs) to find a far less stringent way of routing their way into the equities market.
In the wake of an environment that was already characterised by declining listings in the main market, the idea here was to help build a steady pipeline of entities that, with sufficient incubation in the GEMS market, would transition to the main market and stir activity in the equities.
This launch at the NSE was not surprising. Widening access of public equity markets to SMEs has become a global trend as jurisdictions develop dedicated exchanges, which lower the otherwise stringent listing requirements that characterised the Initial Public Offer (IPO) process for large companies.
The launch of the GEMS at the NSE came just 10 months after the launch of a similar segment in India’s Bombay Stock Exchange (BSE), the BSE SME Board, with the similar goal of wooing small business ventures into mainstream equity markets for capital raising.
A little over a decade down the road and the outcomes of similar measures by the two bourses could not have yielded more divergent outcomes.
Today, the BSE has 383 entities that are listed on its SME Board with 195 having successfully transitioned into the main market.
In stark contrast, the GEMS at the NSE has run into headwinds that have elicited questions about the structuring of the segment, as well as the quality of entities that went to market.
What have we seen at the BSE SME Board and what does it tell us about how to possibly revive activity at the NSE’s GEMS market? Three things struck my attention as I visited the BSE in Mumbai early this month.
The first thing, there have been very deliberate efforts to ensure that there is market confidence in the entities seeking listing.
Ever since its inception in 2012 and after initial concerns around the quality of entities that sought listing on the SME Board, the Securities and Exchange Board of India (Sebi) has taken steps to tighten the scrutiny of SMEs coming to market and ensuring that the listings are investment grade that protect the interest of the yield chasing retail and institutional investors.
We have seen, for instance, Sebi amending the law to bar selling shareholders from offloading more than 50.0 percent of their holding in the entity that is going public. This move is designed to ensure that existing shareholders do not abuse the BSE SME Board to ‘dump’ poor grade entities to unsuspecting investors in the name of going public.
This provision has gone a long way in providing an additional layer of assurance to the market about the quality of entities coming for listing, by ensuring that those who are selling their stake to the public still retain ‘skin in the game’.
The second thing that struck my mind is an appreciation that it takes two to tango and if investors must be guaranteed of investment grade entities coming to market, those entities must equally be guaranteed of a successful capital raise.
Another major step taken by Sebi aimed at bolstering market activity was the provision that SMEs coming to market must have an underlying underwriting arrangement backing the issuance.
This provision takes into cognisance, the fact that whereas the market is generally vibrant and enjoys relatively strong liquidity, there are instances where a company may come to market, at a time when for one reason or another, liquidity has dried up and therefore the issuance risks running into undersubscription.
As such, the underwriters who are typically banks in India, then provide an assurance that there will be a successful capital raise even in the event of generally adverse market conditions, that would otherwise render a listing by an SME abortive.
The third thing that caught my attention was an effort to ensure capacity for the retail investor to conduct due diligence prior to engaging in participation in an SME IPO.
In a market like India where active promotion of IPOs is a common occurrence, Sebi took a decision to prohibit any IPO by an SME where part of the use of proceeds was payment, directly or indirectly, of a promoter.
This move by the market regulator was designed to ensure that in the instance where an SME is going public, the largely unsophisticated retail investor is protected by being allowed ample room, to conduct their own due diligence without noise from promoters whose leaning risks being skewed by conflict of interest.
Kenya has a vibrant SME environment characterised by many ventures that are tapping into private capital markets (private equity, venture capital) to meet their growing funding needs.
The experience from India’s SME Board at the Bombay Stock Exchange tells us that with the right alignment, the public markets (NSE) can provide an alternative route with numerous advantages for these businesses to raise both equity and debt capital.
→ jamboko@ke,nationmedia.com
Unlock a world of exclusive content today!Unlock a world of exclusive content today!
