Sebi bats for 'priority sector' tag for listed SME

The Securities and Exchange Board of India (Sebi) has proposed that bank funding to listed small and medium enterprises (SMEs) be given a priority lending tag.

The move will give a huge fillip to the SME trading platform introduced by Sebi in 2012, to ease the financing needs of smaller companies.

According to sources, Sebi’s proposal has received an in-principle approval from the Union finance ministry. However, the Reserve Bank of India (RBI) will need to agree. By RBI norms, banks compulsory have to lend 40 per cent of advances (of the previous year) to the so-called priority sector.

There are over 80 SME companies listed, with 77 listed on BSE itself.

In November, RBI had allowed incremental bank loans up to the credit limit of Rs 13 crore, (extended after November) to medium-size manufacturing enterprises (as defined in the MSME Act, 2006) to be considered as priority sector advances.

Priority sector lending in India to MSMEs includes direct finance to manufacturing enterprises, loans for food and agro processing, service enterprises, the khadi and village industries sector and indirect finance through loans to persons involved in such activities.

As of now, a little over 2,000 specialised bank branches are available for lending to MSMEs.

Market experts say that there is a lack of formal financing to meet SMEs long-term funding demands. “While accessing bank funding, they face a high cost of borrowing, a need for collateral and instances of delay in release of funds. Such a categorisation for listed small to mid-sized companies would aid in diversifying long-term funding instruments available to them and reduce dependency on their own capital and informal finance,” said an investment banker who has worked on SME initial public equity offers.

There is an estimated need for $12.8 billion of equity funding for the SME sector, of which only $1.8 bn has been provided for so far, through domestic and global venture capital funds.

To meet the increasing capital requirements for SMEs, the capital markets regulator in 2012 had launched the SME listing platform in 2012, called the Institutional Trading Platform (ITP). It facilitates the listing of SMEs without a public offer.

As an additional measure to enhance funding for listed SMEs, the markets regulator could also reduce the disclosure requirements for banks if they agree to lock-in their investments for one to two years in listed SME companies. Currently, banks need to disclose total investments made in equity shares, convertible bonds, units of equity-oriented mutual funds and advances against shares in their balance sheets.