NIFT UG 2011 Question Paper with solutions

  The contribution of small and medium enterprises to the overall growth of the economy is well documented. Not only do they provide more employment opportunities for every rupee of capital invested vis-a-vis the large companies, but the manufacturing sector is also a net earner of foreign exchange. Notwithstanding their contribution, the SME sector is still starved of capital, both from the organized banking sector as also from alternate sources like private equity. Venture capital funds, as also institutions like SIDBI, are wholly inadequate to meet the diverse needs of the SME, spread across the length and breadth of the country. One reason for private equity funds dragging their feet in spotting the winners of tomorrow is the relatively low returns on their time and effort in grooming an SME as compared to a mid-size company.
  Their argument is that the management time invested in grooming the SME is almost the same if not more, even as their capacity to absorb large investments is virtually non-existent. Commercial banks who work on set parameters of lending often find the SME discipline wanting in case of accounting norms, inventories and management of working capital. The cost of zeroing in on the next super-star inevitably acts as a deterrent to private equity firms who prefer to stick to the traditional path. And nowadays all the erstwhile venture capital funds prefer to act like Private Equity (PE) funds. Fear of private equity firms asking for a controlling interest is also one of the factors dissuading promoters from actively seeking private equity funds. Given this scenario, it is important to create an environment and build an infrastructure which allows SMEs to access risk capital. Given that these companies cannot meet the rigorous listing criteria of the larger stock exchanges, at least till such time as they are able to grow to a sizeable level, there is a need to provide an alternate mechanism/ window for the SME. Earlier attempts made by both BSE and NSE have failed to address the problem.
  On both exchanges save for the top few hundred stocks, illiquidity is rampant across more than half of the listed companies. Against this background, the government’s initiative to set up a separate stock exchange for SME is indeed a laudable step. SEBI’s latest proposal defining the framework and requirement of ` 100 crore net worth with nationwide trading terminals will ensure that only serious players will enter the fray. The condition that the clearing function must be performed by a recognized clearing house will also provide a degree of comfort to investors venturing on this exchange. The minimum trading lot of ` 1 lakh is meant to ensure that only investors who are well aware of the risks involved participate. All major exchanges in the world have a separate window for smaller companies. London Stock Exchange’s Alternate Investment Market (AIM) is gaining popularity amongst Indian companies. Nasdaq, NYSE and even Japan have similar windows for smaller companies which are subsequently allowed to graduate to the main markets once they grow in size.
  The problem of creating liquidity in shares is addressed by Nomads on the AIM market who are required to give a two-way quote, like the jobbers on the BSE when the open cry system was in vogue. SEBI which currently mandates either an order driven or quote driven system could learn from the international experience of specialized brokers for SMEs listed on the exchanges. Given the spread of the SMEs across the country at least three or four exchanges will be needed
  A geographic spread would also help in getting regional investors as those who are well-versed with the development in the regions to invest in the companies from those regions. Further, competition amongst exchanges would also ensure quality of services and inculcate discipline amongst the management. One of the reasons cited for OTCEI failure was inadequate attention by the management in developing the infrastructure. Remember, OTCEI was set up at a time when the infrastructure for electronic trading was just not there. While modalities for improving the functionality can be changed along the way, the important thing for SEBI is to do two things. First, spell out the funding requirements for any SME to list. It has to be simple, quick and cheap. In the UK licensed Nomads are authorized to clear documents, satisfying themselves that there is adequate disclosure. And second, to provide a time-frame for the exchanges to start operations as quickly as possible.