S Swamy, a Chennai-based investor, subscribed to 1,000 shares of India Motor Parts & Accessories (IMPAL), a TVS group company based in Chennai, during its IPO in 1997. Listed at Rs 180 on the Madras Stock Exchange (MSE), the stock recorded heavy volumes in the initial stages.

But the automobile industry’s rough times reflected on the stock. Its price gradually shrank. The scrip was often not traded. As the stock was listed only on MSE, Swami had no option but to keep holding an illiquid investment. Luckily, IMPAL came out with a buyback offer to provide its shareholders an exit route.

But not everyone is as fortunate as Swamy. There are many shareholders of small companies listed on the regional exchanges suffering from low liquidity. Besides those listed on regional exchanges, there are many companies on the Bombay Stock Exchange, too, with low equity capital, with hardly any traded volumes. Less than 5% of listed companies were actively traded, and these belonged primarily to A and B1 categories.

However, shareholders of such companies now have an exit route. Indonext, an alternative trading platform for small- and mid-cap stocks, finally kicked off in January this year. Indonext, promoted by BSE, along with the 20-member Federation of Indian Stock Exchanges (FISE) and 22 regional exchanges, was mooted to solve the problem of liquidity faced by investors of small- and mid-cap companies. It was thought that a separate trading platform, exclusively for small- and mid-cap companies, will give them the required exposure and create trading interest, generating liquidity and provide an exit route for sparsely-traded stocks.

BSE has created a special ‘S’ segment, listing scrips that can be traded on the Indonext platform. 511 stocks (166 from the B1 category and 345 from the B2 segment) from BSE, with a paid-up capital between Rs 3 crore and Rs 20 crore, are in the segment. Add another nine scrips currently listed exclusively on regional exchanges. Thus, there are 520 stocks listed on the S segment of BSE.

Indonext is doing brisk business. On 6 January, the first day of trading, 512 scrips changed hands with a total volume of Rs 75.4 crore, which was 3.4% of the total turnover recorded by BSE.

In January, the turnover of S group was Rs 918.45 crore, i.e., 2.09% of the total turnover of Rs 43876.13 crore on BSE. 16.58 crore shares, valuing Rs 774.81 crore, were delivered. The average daily turnover stood at Rs 48.34 crore with 19.9 crore shares traded during the month.

Since then, the average daily turnover of the S segment has risen stupendously. It has increased from Rs 40 crore in January to Rs 71 crore in February. The average traded volumes in this period has risen 93%, from 7 lakh shares to 14 lakh shares.

Indonext has become operational at an opportune time, with the stock markets going through a bullish phase. Since January 2005, the BSE Sensex has risen 13% to 6915.09, from 6102.74 on 12 January. Hence, Indonext scrips, too, are rising. Amtek Auto, which was traded at the Rs 110-level in the second half of 2004, moved higher to Rs 170 towards the end of the year. It touched its yearly high of Rs 185.50 on 11 February 2005. Similarly, Encore Software was trading flat in 2004 at the Rs 5-Rs 7 level. It has now risen several times and is quoting at Rs 39.6.

Indonext has been modelled on Euronext, the first pan-European exchange created in September 2000 by merging the small-cap stocks listed on exchanges in Paris, Amsterdam, Brussels and Lisbon on to a single integrated platform through the electronic system. The companies continue to remain listed on their respective exchanges. This cross-border integration of the bourses has increased the equity trading volumes by over $1.5 trillion annually, far more than the German Stock Exchange and the London Stock Exchange.

In the case of Indonext, too, regional exchanges get to maintain their character. While market surveillance and clearing and settlement will be handled by BSE to ensure market integrity and trading safety, regional exchanges will handle the functions of listing, investor grievance redressal, arbitration and investor education.

Indonext-listed scrips are assured of enhanced liquidity for another reason. The common trading platform has individual market makers to provide two-way buy/sell quotes to buyers/sellers. Besides keeping trading alive in individual securities, the move will augment liquidity in stocks.

A commendable beginning has been made with the formation of this exclusive trading platform. The prevalent bullish sentiment seem an appropriate environment. But to take the legacy of Indonext ahead, innovative marketing and a radical approach to listing, technology, supervision and disclosure are required.

There is also a need to have a separate governing board with representatives of regional exchanges. Besides, market makers should be offered incentives like supply of stocks at reasonable price, availability of working capital at concessional rate of interest by banks and grant of fiscal concessions, like treating profits arising out of market-making functions as long-term capital gains.

If Indonext gains wide acceptance, promoters can think of converting the platform into a full-fledged corporatised and demutualised exchange.

l Exclusive trading platform for small- and mid-cap stocks

l Scrips listed on regional exchanges get a trading platform

l Nationwide order book

l Nationwide reach through BOLT terminals

l Existence of individual market makers for buy/sell quotes

l Negligible investment for connectivity

l Regional exchanges to continue playing a role