Major alternative asset firms are devising strategies to invest in small- and medium-sized enterprises (SMEs), aiming to capitalize on liquidity differences when firms move from junior exchanges to mainboards.
"India's SME ecosystem is evolving rapidly, with several businesses demonstrating strong fundamentals, niche leadership and scalable growth potential," said Hemant Daga, co-founder of Neo Group and chief executive of Neo Alternative Asset Managers. Neo is one of the alternatives firms tapping into the mainboard migration as an investment thesis.
"As an alternatives platform, we believe this space presents a significant opportunity for long-term capital, particularly for companies seeking strategic growth capital beyond traditional financing avenues," he said. "Through our private credit funds, we channelise much-needed patient long-term capital to several SMEs in India, particularly in the manufacturing sector," he said, without naming any company.
Junior boards, such as the National Stock Exchange's Emerge and the BSE's SME platform, enforce rigorous trading restrictions designed to protect casual market participants. Chief among these is a mandate that equities trade in large, high-value lots rather than individual shares. According to NSE Emerge rules, these lot sizes can range from ₹1.4 lakh to ₹1.6 lakh each.
This structural floor deliberately filters out small-scale retail participation, keeping trading volumes muted and leaving many fundamentally sound companies trading at steep discounts relative to their larger, mainboard-listed peers.
Another important differentiator is compulsory market making. SME issuers are required to appoint market makers for a minimum of 3 years from listing. Market makers are required to provide continuous two-way quotes and maintain liquidity in the stock during trading hours.
When a company successfully moves its listing to the mainboard, the lot-size and market-making mandates are dismantled, blowing open the gates to thousands of retail investors and structurally improving the company's liquidity profile overnight.
A two-tier return structure
"This liquidity differential is increasingly being viewed as a valuation opportunity by alternative investment funds and strategic investors. SME companies often trade at a liquidity and institutional access discount, which tends to narrow materially after migration to the mainboard ecosystem," Sanket Jamuar, partner at financial advisory firm JSR Capital Advisors, told Mint.
The payoff for asset managers executing this pre-migration strategy is two-fold, a second alts manager told Mint, who asked to remain unnamed, since their firm's plans to invest in SME stocks are not publicly disclosed yet.
"First, we earn steady yields or structured returns through private credit instruments during the company's SME board tenure. Second, if our investment includes equity kickers or convertible structures, our fund can participate directly in the equity upside when the migration happens."
This manager said that there is ‘a lot of’ institutional rush to capture this arbitrage, which means that pricing of micro-cap risk can see a fundamental shift.
"On the SME exchange, we can pay a heavy liquidity discount for a company that might otherwise exhibit excellent revenue growth and solid margins. The moment that lot-size restriction drops on the mainboard, our portfolio company becomes a highly liquid retail play," this person said. "If we can identify these candidates, and pump in enough capital to operationalize them to the necessary metrics for migration within six to 12 months, we can capture a structural premium that has nothing to do with broader market sentiment and everything to do with exchange market architecture."
Tighter rules are slowing the pipeline
New regulations mandate that any company seeking to migrate to the mainboard must be SME-listed for at least 3 years and have recorded operational revenue of over ₹100 crore in the previous financial year, with positive operating profit in at least 2 of the last 3 fiscals. These companies must also have a paid-up equity capital of over ₹10 crore and an average capitalization of over ₹100 crore.
However, The Economic Times reported on 25 February that these new rules have affected the mainboard transition, leading to a sharp decline in the number of companies successfully transitioning.
So far in 2026, there have only been three migrations from NSE Emerge. These were Globe International Carriers Ltd in February, and Vital Chemtech Ltd and Kotyark Industries Ltd in March. In contrast, 2025 had 15 mainboard migrations throughout the year.
The push by alternative asset managers into junior exchanges comes amid a recent slowdown in India's mainboard equity markets, amid ongoing global headwinds, with the benchmark Nifty 50 falling over 7% in the last three months. Meanwhile, the Nifty SME Emerge index has risen 4.3% in the same period.
While mainboard initial public offerings (IPOs) capture major headlines, the SME segment has quietly been chugging along as a fundraising engine, with 13 SME listings expected this month, according to a Business Standard report on Tuesday. However, the lack of institutional research coverage, limited mutual fund exposure, and the inherent volatility of smaller listings have historically kept conservative institutional capital at bay.
Legal risks
However, legal experts caution that investing in SME companies is not without distinct operational hurdles. The lack of standardized quarterly reporting on SME platforms, which only mandate half-yearly financial disclosures, increases the burden of due diligence on incoming institutional buyers. Upon migration, the market-making mandate that supports SME trading falls away, so the company can no longer rely on structural liquidity support to absorb weak disclosure or poor investor communication, explained Soumya Singh, co-founding partner at law and policy firm Thistle&Law.
"For institutional backers, liability does not arise merely because they invested before migration. But exposure can become serious where they exercise control, act in concert with promoters, hold board influence, participate in disclosures, or are involved in exit timing or market conduct," she said.