The Growth of SME IPOs

~ Krish Vij (MLNC, University of Delhi)

’Budget 2024 expected to propel SME IPO market to new heights’

In the vibrant landscape of India’s SME IPO market, 2023 emerged as a stellar year,
witnessing an unprecedented surge with 162 companies going public. This number is
51% higher than the 108 SME IPOs launched in 2022 and almost triple than the 59
SMEs which went public in 2021. In the present year, 51 companies reported a
subscription rate of over 100 times while 12 witnessed oversubscription of 300 times.
These 162 SMEs successfully raised a cumulative sum of ₹4,617 crores. However, such
has been the frenzy that these IPOs have received bids worth ₹2.8 lakh crore from investors!

Amount raised by SME IPOs in the last six years (upward trend)

4617.14

In Crores

2234.92
1620.08
979.2
470.92
272.8

2018-19 2019-20 2020-21 2021-22 2022-23 2023-24

Financial Year Issue Size

(Source- Angle One)

What are SME IPOs-?

The definition of SME may vary with financial laws and amendments. Currently, enterprises
with turnover of Rs 5 crore to 50 crore and investment of 1 crore to 10 crore are considered
as small enterprises. Whereas, companies having a turnover of Rs 50 crore to Rs 100 crore
and having investment of Rs 10 crore to Rs 20 crore classify as medium enterprises. The
listing process remains similar to traditional IPOs. Underwriters prepare the IPO documents
including the Draft Red Herring Prospectus (DRHP). The appointed banks conduct due
diligence of the company to evaluate financial data. Once SEBI approves the DRHP, SMEs
can advertise, announce and launch their IPO on the stock exchange. SEBI has underlined
numerous requirements for an enterprise to register for an IPO under the SME board. The
company must have a positive net worth in the last 3 financial years. Furthermore, It should
be incorporated under the companies Act -1956 or 2013 and have face value (paid up capital)
of up to 25 crores. BSE proposes further eligibility requirements of having a leverage ratio of
not more than 3:1 and Net Tangible Assets of up to 3 crores in the last preceding financial
year.

In order to analyze the growth of SME IPOs over the years, it becomes necessary to
discuss the 2 major factors influencing this upward trend in the industry.

1-Why SMEs are going public?

A company can acquire funding from various sources. ‘Debt is a cheaper source of
funding as compared to equity’. It involves lower risk and does not dilute the ownership
percentage. Interest payments are tax deductable and leverage can benefit in rapid expansion too.
Also, the growth of the Private Equity industry in India brings an additional option for SMEs
as Venture Capitalist are making heavy investments in early growth startups. Despite of these
other funding alternatives, Public equity proves to be most popular, especially in the case of
SMEs. Going public through an IPO gives SMEs the access to substantial capital resources.
Compared to Venture Capital funding and bank credit, an IPO can provide SMEs with a
lower cost of capital in the long run and offers more liquidity for potential fundraisers
in future. A successful IPO increases the valuation, reflecting investor confidence and the
company's growth potential. Moreover, angel investors and promoters make their ‘exit’
through the public offering or known as ‘Offer for Sale’ in the case. Lastly, IPO
increases the visibility of SMEs and the potential market share, paving free marketing
and promotion in the process.

2-Why retail and institutional investors are subscribing to SME IPOS?

India witnesses an increase in the per capita income by more than double in the last 10
years. As per recent data from the RBI bulletin, released in September 2023, the net
household financial savings has reduced by 5.1 % of the GDP as compared to 7.1% 2 years
back. But why are households earning more money yet saving less with banks?

Beating inflation demands a strategic diversification of the investment portfolio. This is the
most effective way of wealth creation over time. Household sector is now moving towards
asset creation and financial investments. Traditional equity and blue chips equate to less risk,
hence less potential ROI over the long term. Whereas, SMEs are tapping promising sectors
and have potential for exponential growth. By investing in the early stages, shareholders can
see multi-baggers in the making. The bullish momentum of Sensex, reaching all time highs
in the present proves that the money ploughed into equity markets is only on the rise. The
returns made by retail investors have been very lucrative, retaining their interest in small and
medium enterprises. This year 26 SME IPOs have offered returns of over 100% which is
more than any year is the past. Also, Companies listed on the SME exchanges show higher
return on assets, debt-equity ratio and profitability ratios compared to the smallest 25%
of firms listed on the main board.

Future and uncertainties:-

Coming back to the budget 2024, even though interim, SMEs want the attention of the
finance minister on enhancement of credit facilities and funding channels. In the
upcoming interim budget which will be released on 1st February 2024, industry experts
are hoping for incentivized lending rates and credit guarantee schemes. Simplification in
regulatory policies and compliance will make it easier to conduct business. Industry also
demands a change in the application of bank loan ratings (BLR). The 3rd party agencies
which conduct due diligence of SMEs have been using the same set of formats for
evaluation of short term solvency. Tax breaks and government grants are expected, especially
designed for SMEs in order to effectively channelize funds for research and development. Sector
specific incentives will be a matter of discussion too. Even though no major announcement or
policy change is expected in the interim budget, a solution to these complications will
certainly ensure the growth the entire sector resulting in more SMEs making public
offerings in the coming years.

SME segment was launched over a decade ago and has brought more than 800 SMEs to
the stock exchange. However, certain practices have put it under scrutiny with tighter
regulations in the making. A large section of experts believe numbers to be “too good
to be true” as unregistered entities have driven IPOs to oversubscription, ensuring higher
listing gains and grey premium. Nevertheless, institutional investors are making huge
investments in SME IPOs ensuring their genuine demand. In the first month of 2024, 18
SMEs have launched their IPOs marking the onset of a busy timetable for the rest of
the year. Despite of prior predictions and budgetary polices, It is only time which will
tell about the sentiments of investors and market demand for SME IPOs in the following
months.

“Not all of the SME IPOs are going to become the superstars of tomorrow. But, India’s
SME industry will surely contribute exponentially in the nation making this decade”.

References-

https://www.smallcase.com/blog/analysing-the-sme-ipo-boom/

https://www.businesstoday.in/magazine/deep-dive/story/sme-ipos-under-regulators-scrutiny-
will-there-be-stricter-norms-403905-2023-10-31
https://www.business-standard.com/markets/news/fundraising-through-sme-ipos-hits-a-new-
high-in-2023-shows-data-123081500493_1.html

https://www.livemint.com/market/stock-market-news/62-of-176-smes-listed-this-year-have-
delivered-multibagger-returns-details-here-11703647537204.html

https://www.chittorgarh.com/report/sme-ipo-list-in-india-bse-sme-nse-emerge/84/