After having set up and operated MCX commodity exchange in India and a number of specialised commodity exchanges, promoter Financial Technologies India Ltd, which operates one of the world's largest exchange networks,  is reported to be planning a stock exchange in partnership with Anil Dhirubhai Ambani Group firm Reliance Money. 

FT may be eyeing the possibility of an exchange for small  and medium-sized enterprises, an area which is litterred with several failed attempts.

Business Standard reported today that the Reliance Money and Financial Technologies are exploring the option of setting up their own equity exchange.

Quoting sources familiar with the developments, the paper said both companies see enormous scope in an SME exchange since only 5 per cent of Indian households invest in equities compared to the international average of up to 50 per cent.

The scope for a new exchange can be seen from the rapidly growing business of equity derivatives, which are basically instruments whose value is at least partly derived from one or more underlying equities.

The NSE enjoys a virtual monopoly in equity derivatives with daily average volumes at Rs10,000 crore in the spot segment. In comparison, the BSE has a daily average volume of just Rs4,000 crore. The NSE's daily average volume in derivative segment is Rs40,000 crore.

Reliance Money CEO Sudeep Bandyopadhyay is reported to have told the daly that Reliance Money was not looking at the equity segment right now, but given an opportunity, "we will certainly look at setting up an exchange for small and medium enterprises."

"Within the equity market, there is a market segment that still needs to develop," G N Bajpai, former Sebi chairman and currently an advisor to Financial Technologies had said in an interview in the company's annual  report.

Bajpai said "Indian small and medium (SME) companies need a separate exchange because there is no place for SMEs on the national trading platform of NSE and BSE. This is because of two reasons.  We have a regulatory framework, which is not only very expensive but very arduous for SMEs to comply with and secondly, institutional investors are not focused on SMEs.

"I remember myself having inaugurated Indo Next under the BSE trading platform, where companies with capital of Rs20 crore or less were supposed to be traded. Unfortunately, because the managers of the exchange continued to be working from the national trading platform there was no additional focus on SMEs.

"In any case, the trading platform by itself cannot ensure the success of an SME exchange. It also needs to be supported by a whole lot of intermediaries who are committed to work for the SMEs.  I am talking of investment bankers, brokers, depository participants and the likes.

"Today, just five investment bankers cater to 85-90 per cent of the market. They certainly have a lot on their hands that they are not interested in working for the SMEs. If you bring an IPO for Rs10 crore you don't get commitment of investment bankers and we don't have investors to commit. Clearly, a whole market structure needs to come up to support SMEs, not just a trading platform.

"Clearly, the criteria in deciding who should set up an SME exchange should not be influenced by past success or size. The criteria should be whether the institution is capable and committed enough to make it work. Also, we need not one but several SME exchanges. On a broader plane, development of electronic exchange as a business is a recent phenomenon." 

Failed SME exchange attempts
Over the Counter Exchange of India (OTCEI) was modelled on the lines of NASDAQ in theearly '90s. Its management had  introduced many novel concepts to the Indian capital markets such as screen-based nationwide trading, sponsorship of firms, market making and scripless trading.

After the initial euphoria, enthusiasm waned among the participants, sponsors and all those associated with the venture due to inadequate entry norms and poor due.

SEBI then had started the Inter-Connected Stock Exchange of India and in 2005 another venture, Indonext, a partnership between BSE and regional exchanges. Wiser from the experience of OTCEI, the Indonext management set out stiff rules. However the exchange failed to take off.

Worldwide SME exchages are flourishing. LSE's Alternative Investment Market (AIM) was established in 1995 to nourish young entrepreneurial British firms. AIM is home to over 1,500 firms of which close to 250 are listings of firms based outside Britain. Obviously, one of the attractions for overseas firms is the lax regulatory regime.  What's more, NASDAQ, the first screen-based securities market in America, which was opened for smaller technology companies, has progressed beyond technology companies.