Merchant bankers have recently written to capital market regulator SEBI asking it to consider introducing “priority investing” norms for mutual funds, public sector banks and insurance companies keen on investing in small- and medium-sized companies.

‘Priority investing’ would be similar, essentially, to the mandatory priority sector lending requirements for banks, which forces them to devote a part of their loan books to lend to specific sectors, such as agriculture, small businesses and education.

Merchant bankers have now asked that large domestic institutions be made to invest a certain portion of their corpus in small listed companies, particularly those on the SME platform.

In March 2012, at SEBI’s direction stock exchanges set up SME platforms for small and medium enterprises to access the capital market.

The maximum post-issue paid-up capital for a company on the SME platform is Rs. 25 crore with comparatively relaxed norms on profitability track records and financial reporting. However, the minimum size of a trade is Rs. 1 lakh, making the market too big for most small investors and, because of the restriction on market cap, too small for large institutional investors.

This may be why brokerage houses have made some headway in selling SME scrips to large retail investors and HNIs, while mutual funds and insurance companies, the large domestic institutions of the stock markets, are forced to stay away.

Despite this, 143 companies are listed on the SME platforms of the BSE and the NSE, with 66 of those coming in FY16.

Mahavir Lunawat, Group Managing Director, Pantomath Capital Advisors, says introducing a concept such as priority investments will increase liquidity in such scrips.

“PSU banks, insurance companies and MFs should be asked to invest 1-2 per cent of their corpus in SME IPOs.

“Further, banks can be allowed to lend to listed SME companies at concessional interest rates and increase SME financing.”

Pantomath is a prominent merchant banker leading the charge for SMEs going public. However, fund managers are wary of such a proposal. “The problem with SMEs is a lack of knowledge among investors,” said the CIO of a mid-sized mutual fund. “The majority of stocks on the main board are not covered by analysts. So, even if I think an SME stock is good, there should be other people who think it is good when I want to sell the scrip.”

Also, he added, “Good equity funds tend to be in the Rs. 500-1,000 crore range. Even 1 per cent of such a corpus across the whole industry would be an astronomical figure for the SME platform. I think it would be better to raise awareness about SME stocks instead.”

Source: Business Line