Market players opine that in the next two years more than 5,000 SMEs will look at raising capital from outside sources which may include venture capital funds, private equity or even the capital market.

The growing need for capital by this particular segment of the market has caught the attention of a lot of PSU banks and venture capital funds launching SME-focused funds.

The illiquid scrips, mostly of smaller companies, traded on the stock exchanges and the small and medium enterprises planning to tap the capital market are likely to get a boost following the move by the leading stock exchanges of the country such as the National Stock Exchange, Bombay Stock Exchange and companies like Financial Technologies who have expressed their desire to promote a separate trading platform for small and medium enterprise (SME) exchange.

The National Stock Exchange has proposed, along with financial institutions such as IL&FS, IDBI, to set up a separate SME exchange. According to an industry source, the Bombay Stock Exchange is in talks with various banks to jointly propose an exchange for trading in shares of small and medium enterprises.

The effort of Over-the-Counter Exchange of India (OTCEI), the first exchange conceived exclusively for the SME sector, has not taken off, despite at least two earlier attempts to revive the platform.

Financial institutions SU-UTI, ICICI [Get Quote], IDBI and the Life Insurance Corporation of India are the promoters of OTCEI. It is likely that SU-UTI, which owns more than 20 per cent stake in OTCEI, may sell off its stake to interested parties, preferably to companies that are keen to revive the exchange.

Inter-connected Stock Exchange is a trading platform created by 13 regional stock exchanges. Financial Technologies, the promoter of commodities exchange MCX, is proposing to enter the segment in partnership with SIDBI, the state-run lender for SMEs.

Currently, only those companies with a minimum paid-up capital of Rs 10 crore and a market capitalisation of Rs 25 crore or above are eligible to list on the NSE. In comparison, companies with a post issue capital of Rs 3 crore and a minimum market cap of Rs 5 crore are eligible to list on the BSE.

A separate exchange for SMEs will help the management of the exchange to have a focused strategy. Big bourses need to play a developmental role to promote such exchanges.

In January 2005, Finance Minister P Chidambaram launched Indonext, a joint initiative of the BSE and the Federation of Indian Stock Exchanges. Presently, there are approximately 600 companies trading on Indonext.

If the BSE gets the nod from the regulator for an SME exchange, it would expand its present trading platform for SMEs, Indonext, according to sources.

"Listing on a stock exchange will give them (small and medium enterprises) a facelift and will be the starting point of their growth. If they have a good track record of 3-5 years on the SME exchange they can later apply to the main exchanges (BSE/NSE). Presently, there are many norms that cannot be complied by SMEs; it is likely that there may be certain relaxations for them," said a senior official, who submitted the proposal to Sebi.

According to a source, OTCEI and the NSE have been told to follow the regulations even in spirit as domestic institutions such as LIC [Get Quote] and IDBI hold more than 5 per cent stake in the exchange and have to pare their stake according to the demutualisation guidelines.

When asked about the competition for an SME platform, a Sebi official said: "We are not here to reject anyone's proposal. As and when their infrastructure is in place and they are ready for it, we would give our approval. It is for the market to determine which company would be a success."

"Though no guidelines have been issued separately, it is felt that SMEs would require lighter norms," the official added.

Among the global exchanges, London Stock Exchange's Alternative Investment Market is the most successful platform for small issues and has attracted a large number of companies globally, including India, in recent times.