ARTICLE
MAI MOTHERS AIM : POSSIBLE SOLUTION TO THE PROBLEM OF
SME AND PROSPECTING FINANCE
- Shefali Dhingra1
The development of the Small and Medium enterprises (SME) sector has always been on the agenda of any
government that has come to power in independent India. Historical reasons for the same are rooted in
Gandhian philosophy. Today, however its importance is seen because of its contribution to employment
generation, entrepreneurship and regional dispersal of industries.
The Indian Micro, Small and Medium Enterprises Development Act, 2006 gives the following definitions of
SMEs:
•
In the case of the enterprises engaged in the manufacture or production of goods pertaining to any
industry specified in the first schedule to the Industries (Development and Regulation) Act, 1951, a
small enterprise is one where the investment in plant and machinery is more than twenty five lakh
rupees but does not exceed five crore rupees and a medium enterprise, where the investment in plant
and machinery is more than five crore rupees but does not exceed ten crore rupees;
•
In the case of the enterprises engaged in providing or rendering of services, a small enterprise is one
where the investment in equipment is more than ten lakh rupees but does not exceed two crore
rupees and a medium enterprises one where the investment in equipment is more than two crore
rupees but does not exceed five crore rupees.
Today the Indian SME sector roughly provides employment to over 42 million people. It contributes to
about 45% of the total manufacturing output and nearly 40% of India's exports. Thus, promotion of this
sector, given its contribution to employment generation, is absolutely vital to achieve the objective of equitable
growth. Access to finance for this sector is an imperative for encouraging its expansion.
Historical experience shows that Indian equity markets are averse to funding smaller and early stage businesses.
Hence, the micro and small enterprises have traditionally relied on debt financing from banks and non-bank
financial institutions. However, banks too have been selective and cautious in lending to them Forms of
support to this sector have included product reservations, procurement reservations by States, and fiscal
concessions by way of lower excise duties, directed credit and differential rate of interest for lending to this
sector. Inspite of all the efforts made to promote its development the SME sector has been plagued by sickness.
Obsolete technology, inadequate demand, marketing problems, shortage of power, infrastructure constraints,
managerial deficiencies and faulty project reports have over the years contributed to its decline. Today the
SMEs find themselves trapped in a vicious circle where market players hesitate to lend them which in turn
feeds sickness on account of capital inadequacy.
Early stage businesses and prospecting companies too have, more often than not, faced similar problems and
have relied on debt finance. Their growth too has been significantly below potential. On the one hand, large
scale prospecting can be a high risk and high return venture and only specialist funds which have a penchant
for risk, will seek investment opportunities in prospecting companies. However these companies lack tangible
assets which can be used to raise debt funds and expand activities, their only attributes being that they possess
the rights to prospect for a potentially viable resource and the geological skills of their management. On the
other hand, traditional capital market structures require companies to reach a minimum size of operations for
them to be listed on a stock market. This restricts the ability of prospecting companies to raise resources
through capital market listing.
1
The author is working in Ministry of Finance, Department of Economic Affairs Views are personal.
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In the interest of sustaining India's long term growth the encouragement to these sectors is important. Their
expansion and deeper integration with the economy requires adequate and timely availability of credit. At
this juncture it is important for us to look at successful models internationally and find a solution to the
aforesaid dilemma. The examples of alternative trading platforms like London Stock Exchange's Alternative
Investments Market (AIM), Market for Alternative Investments (MAI), Thailand as well as Tokyo Stock
Exchange's (TSE) Market For The High Growth And Emerging Stocks (MOTHERS) may prove to be of
some relevance in this regard. Apart from providing SME-friendly market architecture, some of these alternative
trading platforms also encourage investment in prospecting companies- an issue that needs adequate attention
in India.
THE ALTERNATIVE INVESTMENTS MARKET (AIM)
The Alternative Investment Market ("AIM") is the London Stock Exchange's (LSE) international market for
growing companies. It is open to companies from all sectors and from countries all over the world. AIM is
designed to be as flexible as possible as can be seen from the fact that there is no minimum issue size for
admission, no trading record required, no prior shareholder approval required for transactions, no minimum
amount of shares to be in public hands and no restriction on number of qualified investors. A listing on AIM
is estimated to cost between $500,000 to 1.1 million (Canadian dollars). Its Rules are drafted in plain English
and do not contain legal and technical jargon. The Admission documents are not pre-vetted by LSE but by
nominated adviser (Nomad). Nomads are normally merchant bankers, who oversee a company's admission
to AIM as well as its ongoing regulation. It is mandatory for an AIM company to have a Nomad at all times
to avoid suspension from the market. AIM companies must disclose all price sensitive information in a timely
manner-substantial transactions, related party transactions, reverse takeovers and other miscellaneous
transactions. The Company appoints the Nomad who acts as the principal quality controller for the AIM
market. The nomad lends its reputation to the company for which it acts. Hence the Nomads require the
quality of the admission document to be high and the statements made to be carefully verified by the directors,
with the guidance of their lawyers and the reporting accountants. AIM admission documents which are
incorrect or give a false or misleading impression can give rise to both civil and criminal sanctions for the
directors of the AIM Company. Besides, the London Stock Exchange is very selective about who will be
allowed to act in the capacity of a nomad. A list of approved Nomads can be found on the London Stock
Exchange Website.
Since the AIM offers entry conditions appropriate for smaller and younger companies, many Indian companies
have taken this as an opportunity to enter global capital markets sooner than they would otherwise have been
qualified to do so. Indian regulations require that Indian companies undertake their initial public offerings in
India first, making AIM necessarily the choice of a minority of companies that either are or want to be
established overseas.
It has been reported in the media that the market capitalisation of a total of 23 India-focused firms listed on
AIM crossed 6 billion dollars from their respective dates of admission to the end of April 2008.
MAI
The Market for Alternative Investments (MAI), Thailand is a market for listing of securities of small and
medium sized enterprises. It was established in June 1999 under the Securities Exchange of Thailand Act. It
also has a new listing category (from the year 2000 onwards) "Section 2: High-Growth Enterprises", to cater
to the capital needs of relatively small firms with high growth potential like those in the technology industry.
If the firm has high potential but is not able to list, the MAI helps in finding partners to facilitate its listing. In
fact, the MAI coordinates with various organizations in numerous areas to help potential firms to list on its
segment. MAI promotes mobilization of capital for SMEs as well as helps in reducing their cost of listing. The
MAI has a set of consultants who guide the firms both before and after listing. The criteria for listing on MAI
is fairly simplified and requires among other things , that the firm have a paid up capital of at least 20 million
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Baht, a track record of more than 2 years before filing an application and a net profit of more than zero in the
latest year. The company must appoint a financial advisor. Once a firm is listed on the MAI, the latter works
to bring its corporate governance, including disclosure up to world standards. As per recent figures available
from MAI's website there are about 50 companies listed on the MAI .The market cap of these companies is
23,197.89 million Baht
MOTHERS
Market for the High Growth and Emerging Stocks (MOTHERS) is a new market established by the Tokyo
Stock Exchange in November 1999. The purpose of establishing this market was to create a platform whereby
venture companies can raise capital during their early stage of development. The listing criteria for Mothers
market are simpler than that for Tokyo Stock Exchange. The estimated market value at the time of listing
must be atleast 1 billion Yen (as compared to atleast 2 billion yen on the Tokyo Stock Exchange). The
company must also have 1 year or more of continued business operation (its 3 or more years for listing at
TSE). As on September 2008 there are 197 in the Mothers market. Trading Value on Mothers market at the
September, 2008 was 3250(¥100 mil).
Lessons for India
The Indian Securities Markets are amongst the oldest in the world and through two centuries have shown
admirable enterprise, innovation and a desire to experiment in order to improve their working. Today, there
are all kinds of players in the markets-risk lovers, risk neutral and risk averse. With the increasing number of
investors and financial instruments and the tremendous growth and expansion that has taken place in financial
markets, it is time that we look at equity capital as an important source of funding for both SME and prospecting
companies.
Currently, there is no segmentation in Indian secondary market. Equity financing of the kind traditionally
seen in the corporate sector is absent in both the SME and prospecting areas. It is in India's interest to make
the equity markets for these areas work better. Since these companies cannot afford the relatively stricter
listing guidelines which are applicable to the existing large companies, a sub segment of the Indian bourses on
the lines of London's Aim or Tokyo's Mothers could be viewed as a possible solution. The listing norms for
these markets are different from the main market segments. Not only should we look at easing listing norms,
ensure disclosure and transparency but also ensure enough liquidity through increased retail and institutional
participation.
However, while attempting any such model, we need to be conscious of the problems facing such markets
elsewhere. For example, AIM has grown by offering companies laissez-faire regulation and less paperwork
than some of the world's biggest exchanges however, it is often pointed out by market experts that a lot of
businesses that have come to market in the last few years have been intrinsically unsafe businesses. AIM
companies don't get any regulatory vetting as with regular listed companies. That job is done by private
Nomads. Often the same brokerage firm that pitches shares of a newly offered company does the regulatory
vetting in the capacity of a Nomad. This leads to conflict of interest which is a serious cause of concern.
Regulatory interest requires that Nomads on AIM should get tougher, but at the same time there is a considerable
reluctance from some Nomads to loose a lucrative contract and hence large fee as these Nomads are appointed
by the companies themselves.
Such conflict of interests situations need to be avoided when policy makers in India try to work on an
Alternative markets for SMEs and prospecting companies. It is important to strike a balance by allowing lax
regulation to encourage listing of the upcoming enterprises without deviating from the basic priciples of
regulation and compromising on quality. As regards conflicts of interests problem involving nomads is
concerned, models that are based on regulatory vetting by SROs instead of vetting by nomads can be explored
as a possible option.
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