Volatility on D-Street sucks out liquidity from SME stocks, makes exits tough

Mumbai: Investors of listed small and medium enterprises (SMEs) may have to wait longer to see profitable exits as the lack of investor appetite for smaller companies has dried up liquidity on the platform.

Trading volumes on the BSE’s SME platform have shrunk by 30 per cent since May 2019. The BSE SME index has fallen 12 per cent from its peak in September 2018 compared to a 20 per cent fall in the BSE small-cap index. Market participants said the relatively moderate fall in SME stocks is because of investors’ inability to find buyers for the stocks due to lack for liquidity and market depth in the segment.

“The ongoing volatility in the markets has impacted several short-term investors of SME scrips,” said Mahavir Lunawat, group managing director, Pantomath Advisory, a firm specialising in these companies. “SME platforms are like private equity platforms. They do not offer much liquidity for day trading but they provide a chance for the investors to be a part of the emerging companies.”

In the last three months, the platform has seen an average daily volume of 25,546 shares against an average of 35,839 in the twelve months from April 2018 to April 2019. The average daily volume on the platform since January 2016 has been 34,910 shares. The trading value in the segment too has seen a sharp decline. The platform has witnessed an average trading value of Rs 12 lakh a day since May 2019 against a three-year average of Rs 16 lakh, data showed.

BSE SME snip 1

Brokers dealing in the SME stocks said companies listed on the platform have limited free-float. Trading activity in these stocks is low due to the entry barriers. The minimum ticket size for investing in SME scrips is Rs 1 lakh. This higher ticket size keeps lot of smaller traders away from SME stocks. The ticket size has been kept higher keeping in mind higher risk involved in these stocks.

SME companies also get relief from several disclosure requirements applicable to companies listed on the mainboard. For instance, a company wanting to list on the SME platform needn’t file a prospectus with Sebi as stock exchanges have been given powers to clear the documentation.

Fresh listings on the platform have been impacted due to the market slump. In the current financial year, only 17 companies have tapped the SME market to raise Rs 237 crore. In contrast, the SME platform witnessed 106 IPOs worth Rs 1,620 crore in FY19 and 155 IPOs worth Rs 2,225 crore in FY18, Prime Database showed.

Experts say, while the segment looks lucrative during the bullmarkets, it also tends to suffer more during sell-offs. Small-cap stocks too behave in a similar fashion; they outperform markets during bull-runs while they fall steeper than benchmarks in the bear phase.

Institutional investors who create depth in markets are virtually absent on the platform. Most of the mutual funds don’t have investment mandates to invest in stocks with low market capitalisation.


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