http://www.slideshare.net/sourajitaiyer_mosl/malaysia-article-sourajit-aiyer

1. A S I A ' S F A S T E S T G R O W I N G B U S I N E S S M A G A Z I N E
✺MALAYSIAEDITION✺JULY2013✺TOPPROPERTYDEVELOPERSINSOUTHEASTASIA
■ THE KING OF COFFEE: HOWARD SCHULTZ
■ HOW TO HELP YOUR PEOPLE BRING GREAT IDEAS TO LIFE
■ INSIDER'S VIEW OF THE AGRICULTURE BUSINESS
■ OPPORTUNITIES FOR SMES IN TAIWAN
JULY 2013
MALAYSIA EDITION
RM 5
M I C A ( P ) 0 9 5 / 0 7 / 2 0 0 9
P P 1 5 3 0 4 / 0 6 / 2 0 1 3 ( 0 3 2 7 6 2 )
ISSN 2289-134X
A PUBLICATION OF:
808080
PAGESPAGESPAGES
OF BUSINESSOF BUSINESSOF BUSINESS
INTELLIGENCEINTELLIGENCEINTELLIGENCE
FOR SMES!FOR SMES!FOR SMES!

2. STOCK EXCHANGE FOR SMES
IN EMERGING MARKETS
S
MEs (Small and Medium Size Enterprises)
are a major driver of economic activity, in
developed and emerging markets alike. In
India, SMEs not only provide key inputs to
industry but also contribute a substantial
portion of GDP as well as rank amongst
the largest employers in the country. A key
challenge SMEs face is raising capital. While both bank credit
and capital markets play a pivotal role as capital sources for
SMEs in developed markets, companies in the emerging
markets are relatively dependent on the banking sector. Even
within that, lenders are seen to prefer larger-sized clients due
to risk perceptions related to smaller companies. Even bond
issuances have generally seen to be more successful if done
by large companies. In terms of equity, most SMEs generally
find it difficult to garner financing on the main exchanges.
Given the two observations raised above – i.e. funding
constraints and SMEs’importance for the economy, an SME
stock exchange is believed to be a choice that can give a
boost to their finance raising needs. Such a platform would
attract early stage, growth investment firms, and investors
may get a niche platform to analyse and invest in the‘Next-
Generation of Bluechips’.
While the initiatives of the main equity bourses to launch
SME exchange platforms is a positive move, including that
in India in 2012, the long-term success of these ventures will
largely depend on its format and execution. This faces certain
challenges. Firstly, this platform will need to bring together
the SME universe, which is very diverse in terms of sectors
and segments. Investors need research on these companies
and the smaller companies are often the ones which have
less research available. The ability of sell-side intermediaries
and buy-side managers to ensure regular delivery of research
insights on such a diverse sectoral universe is a challenge.
Secondly, corporate governance and disclosure practices
need to be followed in a standardized manner across
the SME universe. Next, the success of the main equity
exchanges has traditionally been in high liquid scrips, which
are constantly in the radar of investors. Not all listed stocks
are actually traded actively, and in fact, most scrips with
lower trading volumes are actually the smaller companies.
During periods of broad-based market rally, there is still
some interest that flows down to the mid-caps/small-caps
following the initial large-cap rally. However during market
downturn, these smaller companies struggle to generate
investor interest. Periods of market downturn also render
primary market activity as sluggish, which impacts the
success of the exchange platform.
Globally, SME exchange platforms have targeted either niche
segments or offered attractive terms and requirements.
Examples are UK’s AIM which kept flexible requirements like
no minimum listing size and trading in any freely available
currency, Japan’s Jasdaq which targeted small technology
stocks, USA’s Nasdaq First North targeting small, young and
growth companies, Tokyo Exchange’s Mothers, a market for
high-growth, emerging stocks, PLUS Markets which aims to
create a pool of small & mid-cap liquidity in Europe, Toronto’s
TSX Venture Exchange which provides access to public
venture capital for new ventures, Johannesburg’s Alternative
Exchange, a parallel market for quality high growth SMEs,
Hong Kong’s Growth Enterprise Market, which offers
investing in high growth-high risk businesses.
Using the global observations to address the challenges an
SME exchange can face, new SME exchanges may target
niche segments like high growth sectors or companies
and ensure those scrips get listed. Expanding research
coverage will enable transparency, information access,
and understanding on a larger universe of stocks and help
showcase companies with strong business performance
and corporate governance. This could, in turn, help retail
investors identify value-picks from amongst the mid and
small cap universe and help them participate in these
companies with much greater conviction. On the distribution
side, sell-side intermediaries may need to identify specific
niche pockets of liquidity for this segment. Improving
corporate governance and governance principles would
prevent frauds, and it is critical to identify those who score
highest on corporate governance practices including audited
accounts disclosure, annual management statements and
enterprise policy statements. A culture of professionalism
as some SMEs bring in experienced management and
independent board members can help take those companies
to a higher growth trajectory, and deliver superior
performance vs. peers. The transaction costs involved should
be kept at reasonable levels to act as an incentive. Lastly,
the launch timing is dependent on the existing market
conditions, so time it right. Access to capital at the right time
for a growth company may help reap rewards, however,
addressing the concerns is a priority in order to build the
long-term reputation, trust and participation.
032
S
f e a t u r e
By Sourajit Aiyer
SourajitAiyerworkswithaleadingcapitalmarketscompanyinIndia.Theviews
expressedareentirelypersonalandmaynotrepresentthoseofthecompany.
22-37.indd 32 7/1/13 12:58 AM