SME Stock Exchange in India

Indian stock markets have seen phenomenal growth in the recent past, with the benchmark Bombay Stock Exchange's Sensex breaching the 20,000 mark yesterday. There was a little bit of volatility in the markets last week, due to the Participatory Note regulation by the Securities and Exchange Board of India (SEBI), which further tightened the norms for cash inflow from Foreign Institutional Investors. However, there was an interesting development which, among all the market mayhem, went relatively unnoticed: SEBI has approved an exclusive stock exchange for Small and Medium Enterprises (SMEs) in India.

A question that immediately came to my mind was: what does it mean for social enterprises? Economic Times carried a debate on whether we need an exclusive stock exchange for SMEs in India. From a social enterprise point of view, I am not too sure if many SME social enterprises would queue up to list themslves on this bourse. As Deena Mehta rightly points out in the Economic Times debate, an entrepreneurial venture typically starts off with bank loans/personal savings and then receives VC funding or support from angel investors. It is taken over by Private Equity (PE) players once it reaches a certain size and lists on a stock exchange when it reaches the next level. An SME exchange, I presume, aims to provide an alternative to PE money or in some exceptional cases, even VC money.

From a social perspective, atleast in India, SMEs have shown better understanding of base of the pyramid markets than multinationals. I agree that SME social enterprises still have a tough time accessing investments to fund their operations. However, for-profit social enterprises, which typically have social and economic impact as their primary objective, would rather have a single, understanding investor (PE/VC) than many retail, capital-minded stock traders. More often than not, for-profit social enteprises take time to mature and show financial results as they go through a stabilization phase initially, trying to improve the lives of people at the base of the pyramid. And the last thing that they would need in this phase is market pressure to show financial results. Listing on a bourse might, afterall, make them normal profit-making businesses and not social enterprises.

I think the traditional bank loans-VC-PE-Public Listing model works better in the case of for-profit social enterprises. Of course this model needs understanding VCs, such as Avishkaar and Acumen Fund, but it ensures that for-profit social enterprises do not lose their focus. This does not mean that for-profit social enterprises should not list publicly at all. That can happen once they have proven business models and have ensured the impact that they would have set out to achieve.

It will be interesting to see how popular the proposed SME stock exchange will become among social enterprises.