SME stands for Small and Medium-sized Enterprise. It refers to a business that falls below certain thresholds in terms of its employee count, annual turnover, or balance sheet size. The specific definition varies depending on the country or organization defining it.
Small and Medium Enterprises (SMEs) are the backbone of the Indian economy, contributing significantly to GDP and employment. Recognizing their potential, dedicated platforms like BSE SME and NSE Emerge provide them with an avenue to raise capital through Initial Public Offerings (IPOs). This article delves into the world of SME IPOs in India, exploring the trends of the past five years and offering insights for potential investors.
To list on the NSE Emerge or BSE SME platforms, companies need to meet specific eligibility criteria set by SEBI (Securities and Exchange Board of India). Here's a breakdown of the key requirements:
General:
Registered in India: The company must be incorporated under the Companies Act, 1956/2013.
Track Record: At least 3 years of operations, except for conversions from partnerships/proprietorships/LLPs, which require a track record in the previous firm.
No Winding Up Petition: No winding-up petition should be filed against the company by the National Company Law Tribunal (NCLT) or a court.
No BIFR Referral: The company must not have been referred to the Board for Industrial and Financial Reconstruction (BIFR).
Website: The company must have a functional website.
Demat Trading: Agreement to trade in Demat securities.
Promoter Stability: No change in promoters for at least a year before filing the IPO application.
Financial:
Post-Issue Paid-Up Capital: Maximum of ₹25 Crore.
Net Worth: Minimum of ₹1.5 Crore (generally). For broking companies, minimum of ₹5 Crore in 2 out of 3 years or ₹25 Crore in 3 out of 5 years.
Net Tangible Assets: Minimum of ₹1.5 Crore (generally). For broking companies, minimum of ₹3 Crore.
Profitability: Profitability route (Entry Norm I): Average operating profit (before tax) of at least ₹15 Crore in any of the last 5 years. Alternatively, positive net worth in at least 2 out of 3 preceding years.
A Flourishing Landscape
The SME IPO market in India has witnessed a remarkable surge in recent years. Following a lull in 2020 due to the pandemic, the year 2023 saw a significant jump with 56 SME IPOs raising over ₹7,000 crore. This momentum continues in 2024, with 10 SME IPOs already closed and several more in the pipeline. This growth can be attributed to several factors, including:
Government initiatives: The Indian government actively encourages SME growth through initiatives like "Start-up India" and relaxed listing norms for smaller companies.
Increased investor interest: With traditional asset classes offering lower returns, investors are increasingly looking at alternative investment avenues like SME IPOs, lured by the potential for high growth.
Tech-driven platforms: Online platforms offering simplified IPO application processes and investor education have made participation easier for retail investors.
For companies considering an SME IPO
Capital Raising: An IPO allows companies to raise significant capital for expansion, working capital, and strategic initiatives. This can fuel growth, diversify funding sources, and reduce reliance on traditional loan options.
Brand Visibility: Going public enhances brand recognition and credibility, attracting new customers, investors, and talent. This can strengthen the company's market position and competitiveness.
Liquidity for Investors and Founders: An IPO provides liquidity for existing investors and founders, unlocking value from their shares and potentially offering financial freedom.
Improved Corporate Governance: The IPO process necessitates stricter financial reporting and compliance standards, leading to better corporate governance and transparency.
Compliance and Regulatory Costs: Listing involves adhering to regulations and incurring ongoing compliance costs, which may strain smaller companies.
Information Disclosure: Public companies face increased scrutiny and need to disclose sensitive financial and operational information.
Investor Relations: Maintaining effective communication with investors and managing market expectations requires dedicated resources and expertise.
A Trend Analysis
Amount Raised: Since inception, SME IPOs have garnered over ₹72,000 crores ($9.2 billion) across 800+ issues. 2023 witnessed a record year with ₹23,000 crores raised, signifying growing investor confidence and company interest.
Value After Listing: While data varies across issues, many SME IPOs have seen positive post-listing performance. A 2022 Sebi report showed that 52% of SME IPOs traded above their issue price a year after listing. However, volatility is prevalent, and individual company performance plays a crucial role.
Subscription Rates: SME IPOs typically receive good subscription rates, exceeding 100% on average. This reflects strong investor interest, driven by hopes of high growth potential and diversification opportunities.
Growth in Numbers: The number of SME IPOs has witnessed a steady rise in the past five years. From 54 issues in 2019 to 166 in 2023, the platform has shown increasing traction.
Sectoral Diversification: While manufacturing and textiles traditionally dominated, newer sectors like technology, food processing, and healthcare are gaining prominence. This trend reflects the evolving Indian economy and investment landscape.
Performance: The average return on investment (ROI) for SME IPOs has fluctuated, ranging from 20% to 50%. While promising, it highlights the inherent risk associated with smaller ventures.
Subscription Rates: Over the past five years, subscription rates have varied from under-subscribed to heavily oversubscribed, indicating investor interest but also underlining the importance of thorough due diligence.
Regulatory Changes: SEBI has introduced initiatives to streamline the SME IPO process and enhance investor protection, fostering a more favorable environment for both companies and investors.
Investing in SME IPOs
Potential for High Returns: SME companies often have high growth potential, leading to significant share price appreciation if they succeed. This potential for outsized returns attracts many investors.
Increased Risk: However, SME companies are inherently riskier than established players. They may lack a proven track record, face intense competition, or be susceptible to industry-specific fluctuations.
Conduct thorough research: Deeply analyze the company's financials, business model, competitive landscape, and management team.
Due Diligence is Key: Carefully assess the company's financials, business model, management team, and industry risks before investing.
Understand the Lock-in Period: Most SME IPOs have a lock-in period, restricting immediate sale of shares. Factor this into your investment strategy.
Invest for the long term: Don't expect quick gains. Be prepared to hold the investment for several years to allow the company to grow.
Diversify Wisely: Don't concentrate your portfolio solely on SME IPOs. Maintain a balanced approach and consider traditional investment options.
Seek Professional Advice: Consult a financial advisor with expertise in SME IPOs for personalized guidance based on your risk tolerance and investment goals.
Conclusion
The SME IPO market in India is on an upward trajectory, offering exciting opportunities for both companies and investors. However, careful navigation and informed decision-making are essential for navigating this dynamic space. With continued government support, improved regulations, and enhanced investor awareness, SME IPOs can play a pivotal role in fueling India's economic growth and fostering entrepreneurial spirit.
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