The initial public offering (IPO) of small-medium enterprises (SMEs) has broken records in terms of volume and value this year as several small businesses have moved forward to raise capital through public issues to fulfil their capital requirement.
The improved standard of companies has attracted institutional investors and banks which is a sign of the maturity of the market.
SME IPOs were introduced in 2012 to enable small and medium firms to raise capital through public investment. The stocks get listed on separate platforms which are the National Stock Exchange (NSE) Emerge and the Bombay Stock Exchange (BSE) SME and migrate to the mainboard exchange subject to qualifying certain prerequisites.
To issue an SME IPO, the firms should adhere to certain criteria including post-issue paid-up capital of up to Rs 25 crore and net tangible assets of at least Rs 1.5 crore
The recent surge in SME IPOs may be linked to an increase in investor desire for better returns, which has been fueled by the dynamic SME sector and benchmark indices reaching new highs in recent months.
Furthermore, legislative reforms, streamlined listing procedures and digitisation have increased the efficiency of capital raising contributing to the current surge in SME IPOs.
Notably, SMEs have become an essential component of India's socio-economic growth and they have a cheaper capital cost and provide more job prospects. Over 66 lakh new businesses have been registered in the country as of 2022.
Performance Of The SME IPOs
When the SME Emerge platform was started in 2012, a total of 24 SME firms were issued to public offering, which increased to two-fold in FY16. In FY18, the recorded 155 SME IPOs were issued which has been the highest till date.
More than 850 IPOs have been issued in this category and out of these a significant number of firms have been migrated to the mainboard platform viz. NSE and BSE.
Listed SMEs have two opportunities for moving to the mainboard, voluntary, if the company's issued capital is greater than Rs 10 crore but less than Rs 25 crore. Mandatory, if the company's issued capital exceeds Rs 25 crore.
RBM Infracon, Exhicon Events Media, Remus Pharmaceuticals, Quicktouch and Goyal Technologies are among the few SME IPOs of 2023 which have delivered 300 to 450 per cent returns which is almost equivalent to five times of five years Nifty 50 returns.
Of the 140 SME IPOs listed in the current year 2023 on both NSE Emerge and BSE SME in 2023, 111 have listed at gain at the end of the first day and 24 settled at a loss at the first-day end. Historically, the mean return on mainboard IPOs and SME IPOs is 76 per cent.
"So, SME IPOs too have fared well in line with overall primary market returns. However, owing to the inherent risks of smaller and less-established companies, it's crucial for investors to conduct thorough research and due diligence on each IPO's fundamentals, management expertise and industry dynamics before considering an investment,” said CA Nikhil Shah, Director, Beeline Capital Advisors.
After mainboard conversion, the performance of SME stocks improves. SME stocks have benefited after transitioning from the SME platform to the BSE and NSE markets (mainboard), providing investors with better profits.
Most SME IPOs are relatively priced at just eight to ten times the profitability, which is mainly historical and hence is attractive compared to mainboard public issues which are priced more dynamically on forward earnings.
Given the strong promoter's commitment to expanding and strong business model, recent intuitional investors have started participating in the growth stories of these companies. "We feel this is the next wave of India's Growth story to come. In the next few years, we will see a couple of these SMEs becoming big," added Shah.
SME IPO Surpassing The Past Volume
So far in 2023, over 140 SMEs have raised Rs 3,540 crore through initial public offerings. This was more than the 109 firms that raised Rs 1,875 crore through IPOs in 2022, according to statistics from Primedatabase.
Only 17 IPOs were listed in the last quarter of FY23 (first three months of 2023), whereas the majority of IPOs were issued for public offering in the first two quarters of FY24. Out of 140 firms, 37 firms raised Rs 1,000 crore in September only which is the highest since 2012 when SME IPOs began.
“Banks were indeed keen to facilitate the simultaneous launch of such SME IPOs. This rush can be attributed to several factors, including the high demand for SME offerings and the innovative businesses within this sector. Additionally, regulatory reforms and streamlined listing procedures have made the process more efficient," said Kulbhushan Parashar, Founder and Managing Director, Corporate Capital ventures.
However, Parashar added that it's important to note that each IPO undergoes thorough research and evaluation to meet regulatory and market requirements. Merchant bankers ensure the offerings are well-prepared and compliant before going public.
According to the experts, it should also be mentioned that SME firms are required to report their financial numbers once in every two quarters, while primary firms are required to post their financial numbers every quarter.
If the 30 September deadline is not met, SMEs must revise the prospectus with half-year financial figures. These figures must be reported to the Ministry of Corporate Affairs first, then to the exchange, and finally to the market regulator, the Securities and Exchange Board of India (Sebi).
However, prior to 30 September, the documentation only needed exchange clearance instead of SEBI leading to a surge in SME IPOs in September.
Should Retail Investors Consider SME IPOs As An Easy Money Tool?
Out of the 149 IPOs listed on BSE and NSE emerge platforms so far this year, more than 35 IPOs have been listed with a loss, whereas 23 SME IPOs ended with discounted listing, according to data provided by Chittorgarh.com.
The listed gains are imperative, it determines the profit for any retail investors as they are not bound by any lock-in period, which means they are allowed to sell the stocks immediately after their listing.
For example, Kahan Packaging listed with 99 per cent gains at Rs 152 against the issue price of Rs 80, the stock was listed in September, however, the stock’s gains have been shrunk to around 30 per cent at Rs 104. It should also be highlighted that Kahan Packaging was the highest subscribed SME IPO of 2023.
“Retail investors should consider investing in SME IPOs with a medium-to-long-term perspective and should be willing to take risks. It's an opportunity for retail investors to participate and benefit from the growth of innovative and dynamic small businesses. These companies will eventually grow into big mid-size companies. Risk-and-returns are part of the game, hence investors should take certain risks after research," Parashar mentioned.
Parashar asserted that well-researched investments in SME IPOs can yield significant returns and diversify one's investment portfolio. It's essential to stay informed, seek expert advice when needed, and participate in the growth story of promising SMEs.
Since 15 per cent of the SME IPOs have been listed with negative gains, investors should be cautious before participating in the IPO subscription. Experts advise due diligence before investing.
Shah also said, “For individuals with an interest in SME IPO investments, we strongly advise adopting a cautious and well-informed approach. Begin by conducting comprehensive research on the specific company, delving into aspects such as its financials, business model, management team, and industry trends. It's essential to carefully assess both the growth potential and associated risks, bearing in mind the limited track record often associated with SMEs. Diversify your investments to mitigate risk, avoiding over-commitment to a single IPO."
He further stated that don't hesitate to seek guidance from a financial advisor or an expert and establish a clear exit strategy should the investment not meet expectations. Most importantly, exercise patience and maintain a long-term investment perspective, as SME IPOs often require time to fully realise their potential.
While there have been allegations of manipulation in SME IPOs, it's crucial to emphasise that the majority of these listings adhere to stringent regulatory requirements. Merchant bankers play a pivotal role in conducting due diligence to ensure compliance and integrity in the process. Any misconduct should be promptly investigated and addressed by regulatory authorities. It's essential to maintain confidence in the SME IPO ecosystem, as it remains a vital channel for small businesses to access capital and foster economic growth, said Parashar.
For the second half of FY24, there is a significant number of SME IPOs in the pipeline. Since the trajectory of the board market is still struggling to sustain uptrend momentum, the IPOs seem to have less correlation with the ongoing market trend. However, the growth outlook of India remains intact, Investors must consider the micro-indicators before investing.
