Publication - Working Paper
Assessing the impact of listing on access to finance for small and medium enterprises
Small and medium enterprises (SMEs) are globally viewed as an engine of economic growth. The sector becomes the focus of policy because it serves to create jobs, and involves innovation that leads to inclusive growth. This is particularly true in countries like India, where inclusive growth is the focal point of economic policy.
The latest estimates from 2012-13, shows SMEs as constituting around 37.5% of the Indian GDP and employing 40% of the total workforce in the country. A key element that impedes growth of this sector is limited access to external finance. SMEs are informationally opaque, which adversely affects the ability of firms to raise funds from formal financial institutions. If this is a bottleneck, then policy should intervene to improve information symmetry, aiming to improve SME access to finance, and then to growth.
One such policy intervention in India came when the Securities and Exchange Board of India (SEBI), in 2010, issued guidelines to set-up dedicated trading platforms on exchanges for SMEs to raise equity capital. As of February 2016, 125 SME firms have been listed. As with all listed firms, listed SMEs have higher and standardised disclosure requirements compared to firms that do not list. For the listed SMEs, firms can be located from the set of registered firms but not unlisted SMEs. There are a total of 20,532 such firms in the Prowess database. The study will match the treated (listed) firms with the control (unlisted) firms based on firm size, industry, age and leverage using propensity score matching. Once appropriate matches are found, the intervention will be used to identify the effect of information asymmetry on SMEs. The impact could be measured as improved access to debt finance, and better performance in terms of efficiency and profitability of the matched treated firms vis-a-vis the matched control firms.
Another identication opportunity arises when listed SMEs migrate to the main exchange. The levels of disclosure on the SME exchange tends to be lower than on the main exchange. Since 2010, 16 SMEs have achieved the migration to the main exchange. If controls can be located for these firms in the set of listed SMEs, we can analyse whether the less regulated markets attract lower quality firms. Quality of the firms can be captured in terms of firm growth and market valuation.
Both analyses will add to the growing literature on impact of access to finance on SME growth. Given that there are few SME exchanges globally, such evidence is scant. By exploiting the Indian experiment, the study will provide new evidence on how the listing can improve debt and equity financing in a developing economy.
The analysis will also provide quantitative research support for policy formulation. The SME exchange platform has been jointly promoted by the Ministry of Finance (MoF) and SEBI, to provide more avenues for equity financing to the SMEs. A review of how well listed SMEs are able to access financing will be of interest to both these stakeholders. It has the scope to understand the existing bottlenecks in the system, and to then designs improvements to the intervention. The findings will also be of interest to the Ministry of MSME which will benefit if this mechanism brings more firms on the registered platform.