SME IPOs: A gateway to emerging market opportunities

March 2012 saw a new chapter unfold in Indian equities, The Securities and Exchange Board of India (SEBI) rolled up its sleeves and initiated a slew of changes in the listing norms for Small and Medium Enterprises (SMEs). 

SMEs represent over 90 per cent of the total businesses in India comprising almost the entire middle class in the country. 

Regulatory changes boosted their inclusion in the financial world, providing them with an opportunity to raise equity and leverage the growing investor base in India. 

The National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE) launched separate SME platforms to help these companies tap capital markets, sowing seeds for what will become a separate industry. 

Also Read: Foreign investors tap small and mid-cap firms to seek the next winners in booming Indian stock market

Fast forward to 2023, we saw the fruits in their fullest - 179 companies listed on the SME platform with 117 (65 per cent) giving a return of more than 24 per cent from their listing price, 67 companies (37 per cent) giving more than 100 per cent return from their listing price, generating thousands of crores in shareholder wealth and fuelling the SME engine across the country which is arguably the backbone of any emerging economy.

Also Read: How to transfer shares from one demat account to another? A step-by-step guide

A country that thrives on entrepreneurial spirit, the SME sector holds a lot of importance. Job creation, innovation, income generation, regional development, industry growth, and increased competitiveness are a few obvious benefits of a dynamic SME sector. 

They often operate in narrow markets and create distinctive items utilising exclusive methods, their competitive advantages are more often attributed to the quality, total cost of ownership, excellent performance, and tight client relationships than to cost leadership. 

Such characteristics make them unique and vital to the economic machinery in any country.

Since 2012, pushing the SME IPO market has been transformative, apart from fundraising, listing SMEs is a big validation for small business owners. 

Also Read: Around two-third of small-caps have become multi-baggers in last 4 years: DSP Report

It symbolises transparency in a sector that is often perceived as grey and far away from being a part of the structured finance world. 

By democratising access to capital for small businesses, and enabling them to tap into public funds, they can realise their growth potential like never before. 

With increased investor scrutiny, SMEs are guided towards better corporate governance and accountability which are essential for sustained growth.

What it means for investors?

In early 2021, I was analysing a mutual fund portfolio (equity) that was spread across 13 schemes and six different AMCs. 

Upon risk assessment, we observed that 36 per cent of the total investment had exposure to the financial sector alone and the top 13 bluechip companies like Reliance, Tata Steel, Infosys, TCS, HDFC, Bajaj, etc., were common across all the schemes. 

While the investors would assume diversification to their portfolio across 13 different funds, underlying assets are the same hence posing a concentration risk in both sector and stocks. 

A similar assessment across all my clients’ portfolios showed the same result. 

While the campaign ‘Mutual Fund Sahi Hai’ was doing well to increase participation, the supply side remained weak. In the same year, surprisingly, mutual funds such as SBI Small and Midcap Fund, and Mirae Asset Small Cap Fund put restrictions on the inflow and stopped accepting additional funds. 

The fund managers cited ‘lack of investment opportunity’ and ‘overvaluation of existing stocks’ as the main reasons.

With the SMEs accessing capital markets, investors now have a whole new crop of companies to invest in. 

This has helped them diversify their portfolios, avoid concentration risk, become an active part of the India growth story at the root level, and enhance returns. 

This matchmaking of investors to companies has been a win-win for all and created an ecosystem feeding off capital to grow and thus benefiting everyone along the way. 

Fund managers have access to more stocks and can judicially allocate funds through MFs and PMS schemes. There are only 483 companies listed on the SME exchange and 410 of them are valued below ₹2000 crore; this provides a huge opportunity and a long runway in this sector. 

The untapped growth potential in terms of new entrants and existing ones growing into Mid-cap companies is huge and exciting.

Going forward, the rise of SME IPOs is a new chapter in the Indian stock market and a golden era in our emerging economy. 

Inclusive growth in any country forms the backbone of a robust financial and social structure. 

The mutually beneficial ethos which forms the very basis of the stock market is being utilised at its best. 

SEBI has been working on further simplifying the listing process and reducing compliance to foster confidence and make it easier for them to navigate the world of finance. 

What was always the backbone of our economy is also becoming a gateway of opportunities for millions just about starting their stock market journey.

Also Read: What is the difference between a demat and a trading account? MintGenie explains

(The author of this article is Director at SKG – Investments & Advisory)

Disclaimer: The views and recommendations above are those of the author, not of Mint. We advise investors to check with certified experts before making any investment decisions.