Seeking a share in SME IPOs? Here’s the allotment secret

Investing in SME IPOs offers a chance to diversify portfolios and tap into the growth potential of small and mid-sized companies. SME indexes have outperformed established benchmarks, showing a CAGR of 39% over 2 years. India's pro-SME policies create opportunities for exponential gains.

Rajesh Singla
First Published14 May 2024, 11:23 AM IST
To participate in SME IPOs, retail investors can open demat accounts and apply for shares.
To participate in SME IPOs, retail investors can open demat accounts and apply for shares.

Investing in Small and Medium Enterprises (SME) IPOs (Initial Public Offerings) can be a rewarding opportunity for investors looking to diversify their portfolios and tap into the potential growth of small and mid-sized companies. SME IPOs offer a chance to invest in promising businesses during their early stages of growth, potentially reaping significant returns in the long run.

Why SME IPOs?

A close look at the performance of the SME Index reveals a compelling trend: Small and Mid-sized Enterprises have consistently outperformed established benchmarks like the Nifty 50 and the Nifty Small Cap 100. Over the past two years, SME indexes have shown a Compound Annual Growth Rate (CAGR) of 39%, compared to 12% for the Nifty 50 and 16% for the Nifty Small Cap 100 respectively which shows almost 2.5x multiple.

India's SME sector has been a powerhouse of progress for years, contributing a significant 30% to the nation's GDP and approximately 45% to India’s total exports. With the government's pro-SME policies, including easier loans through the Mudra Scheme, tax benefits, and initiatives like ODOP & PLI scheme, the future looks even brighter.

This presents accredited investors with an opportunity to make exponential gains by investing in SME companies. Let’s take a look at how to secure allotment in SME IPOs.

In what capacity can you apply for SME IPOs?

There are three ways through which an individual can apply for SME IPOs namely:

Retail Investor: Direct investment in SME IPOs allows investors to participate in the early growth stages of small and medium-sized enterprises. By opening a demat account with a registered stockbroker or intermediary, investors can apply for shares during the IPO process.

Although this process suffers from a lack of access & a lack of liquidity, investors don’t get Quality shares in IPO through allotment, even though the minimum ticket size is 1,00,000/- only. Good IPOs get highly over-subscribed.

For instance, take the example of Kay Cee Infra Limited which had allotted 9,82,000 shares for Retail Investors & got applications for 128,74,98,000 shares, showing a multiple of 1311x. In other words, out of every 1311 Retail Investors, only 1 Retail Investor got an allotment.

Take another example of Amcay products. While the issue size was 12.6 cr., the amount raised was close to 6,261 cr. Out of this, the shares allotted to Retail Investors was 7,62,000 & applications bids stood at a whopping 74,15,30,000 which shows a 973x multiple. In other words, it means out of every 973 people, only 1 retail investor got an allotment.

High Networth Individual: Similarly High Networth Individuals become prey to the lottery system of allotment in addition to highly over-subscribed offerings, where even if HNIs are ready to invest 10,00,000/-, they fail to get an allotment as the lottery system is dependent on luck and many people miss out.

Take, for instance, Amcay products itself where they had offered 3,26,000 shares while application bids were placed for 32,18,74,000 shares, which brings us to a multiple of 987x. In other words, out of every 987 HNIs, only 1 got an allotment through the lottery process.

Kay Cee Energy & Infra Limited, another SME company launched its IPO this year. While the Issue size was 15.93 cr., the IPO saw very high traction, getting subscribed over 1052x & raising 11,139 cr.

Among the allotments, the shares offered to HNIs stood at 4,22,000 whereas the application bids offered for shares to HNIs stood at 70,43,06,000, reaching a multiple of approximately 1,669. In other words out of every 1,669 HNIs, only 1 HNI got an allotment. As a result, many HNIs were unable to get an allotment.

Anchor Investor: The Anchor Investor process is rapidly gaining traction among investors as the demerits faced in the Retail & HNI process don’t apply here. Unlike the earlier process where Investors were competing to get an allotment, in this process, Anchor investors sit at the table with the merchant banker & unlike the lottery process, here the merchant bankers get to choose the AIFs & vice-versa.

There are a few VC Funds & AIFs such as Planify VentureX Fund that solely focus on SME Companies & sit as an anchor investor in their IPO proceeds. Since these are professional bodies, they not only oversee the process of investment but also when to exit from these SMEs, making the entire process of investment hassle-free. To get assured allotment to SME IPO opportunities, such VC Funds & AIFs are the best option.

In conclusion, investing in SME IPOs can be a lucrative opportunity for investors willing to do their homework and take calculated risks. By conducting thorough research, assessing valuation, staying informed, and implementing effective risk management strategies, investors can increase their chances of securing their share in SME IPOs and potentially unlock significant long-term gains.

Investors need to keep in mind that successful investing requires patience, discipline, and a long-term perspective. With the right approach, SME IPOs can be an excellent addition to your investment portfolio and help you achieve your financial goals.

Rajesh Singla, Founder & CEO, Planify

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First Published:14 May 2024, 11:23 AM IST
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