Why should SMEs consider going public? SMEs need capital to grow but due to funding hurdles, most of them are unable to scale or expand their business. Is funding the only reason to go for SME IPO, of course not! Well, many factors, including but not limited to brand building, enhanced credibility and prestige, and competitive edge, encourage owners to take their SMEs public for fundraising and listing on the exchange.
Since the launch of SME platforms in 2012, SME IPOs are gaining momentum in India. The year 2023 alone witnessed a huge surge in SME IPO with 179 SMEs listed together on NSE SME or BSE SME bourses.
Let’s discuss 10 compelling benefits that encourage SMEs to go for IPO.
1. Access to Required Capital
- The key objective of any public issue is raising capital. When an SME goes public, promoters invite the public to buy shares at a fixed price, which provides them easy access to capital.
- SME exchange platform provides a fundraising channel for SMEs to raise the capital they need for expansion, growth, acquisition, and others.
- BSE SME and NSE Emerge are the dedicated exchanges for the listing of SME shares.
2. SME IPO Increases Investor's Participation with High Liquidity
- After listing, the company’s shares are publicly traded on the relevant SME exchange which results in wider investor outreach.
- Listing provides a transparent trading platform with easy entry and exit options for investors. As investors can buy and sell shares anytime on the exchange, increases trading activities in SME stocks.
- Listed SMEs can attract a diverse investor base, including retail investors, high-net-worth individuals, and institutional investors.
- Listing provides liquidity to investors and allows them to realize profits by selling their shares. For instance, an IPO provides a great exit strategy to early investors, angel investors, and venture capitalists, as they can offload their equity stake to book returns.
3. SME IPO Promotes business visibility, credibility, and drive value
- The process of going public and being listed on exchange increases business visibility among the public, investors, partners, customers, and other stakeholders.
- Privately held SMEs are not well known but when they decide to raise funds via SME IPO, the company gains media attention and news coverage, which results in a high level of public awareness.
- Publicly listed SMEs have to meet the exchange regulatory and compliance standards such as timely reporting to exchange and disclosure requirements, which enhances business reputation, prestige, and credibility to a surprising extent. However, non-compliance can also deteriorate your brand image.
4. Helps in Market Valuation
- Shares of a listed entity are traded on exchange and the trading price reflects the true value of the company’s shares.
- Listing establishes a transparent basis to decide the market value of your company. Price to earnings and price to book value are the most commonly used valuation metrics that are benchmarked against peers to reflect a company’s true worth.
- Company promoters can make correct business valuations for key events like mergers and acquisitions.
5. Improved Governance and Management
- Listing on SME exchange requires companies to follow an effective internal control mechanism and sound governance practices, which helps in strong business management.
- SMEs seeking listing have to submit the due diligence report specifying the liaising with legal and regulatory requirements which requires good management.
- Even post-listing, SMEs are subject to various ongoing compliance norms of SEBI; submitting annual reports, audit reports, shareholding structure reports, etc., leads to greater transparency.
6. SME Listing provides Competitive Edge and Support Strategic Growth
- Publicly traded SMEs have competitive benefits over unlisted peers with high visibility, credibility, and brand awareness.
- Also, access to the capital market provides the opportunity for strategic growth prospectus such as expanding into new markets, developing new products to diversify product portfolio, merger & acquisition, etc.
- The decision to go public via SME IPO raises equity capital for companies which comes with no fixed service obligations such as interest, which makes it a cost-effective method of fundraising. However, your equity ownership stake gets diluted to shareholders.
7. Benefits of Employee Stock Option
- Employee Stock Options (ESOPs) is an employee benefits offered to a company’s employees to buy a certain quantity of the company’s shares at a set discounted price.
- Listed SMEs can offer ESOP benefits to their employees to attract and retain a talented workforce, compensate workers, and boost employee commitment.
8. Listed SMEs can be migrated to the mainboard exchange
- Direct listing on the BSE and NSE is a costly affair and requires extensive preparation and documentation. So, if you have been a listed SME company for the last two years, you can take a step forward by moving to the mainboard stock exchanges; BSE and NSE.
- BSE and NSE have different migration policies or criteria for shifting from SME to mainline exchange.
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Migration offers management the opportunity to swiftly transition the company into a process-oriented organization in preparation for migration to the Main Board.
Check How SMEs can be migrated to main board
9. Easy Reporting Requirements for Listed SMEs
- SMEs are comparatively subject to relaxed regulatory norms than mainline companies.
- A company listed on the SME platform has to submit half-yearly results to exchange, whereas a mainboard company needs to declare and publish results every quarter. Easy reporting makes less regulatory reporting requirements for listed SMEs.
10. Helps to improve the balance sheet
- Raising capital via SME IPO brings equity capital without any cash outflow or timely servicing costs.
- Companies can use the capital raised to pay-off its debt liabilities, growth and expansion, and diversification.
- Thus, you can utilize the money raised to improve your operational performance with rising revenues and profitability, and optimize your capital structure.
