Uncovering the Growing momentum of SME IPO

SME IPO is a buzzword today as more and more small and medium-sized enterprises (SMEs) choose to go public by launching their Initial Public Offering (IPO). The growing momentum of SME IPO segment can easily be seen in the oversubscription of SME IPOs not only by institutional investors, brokerage houses and asset managers but also in the fact that SME IPOs are widely subscribed by retail investors.

Yet many of us do not know the reasons for the growing popularity of SME IPOs. This article will uncover the facts about why SME IPOs are in such high demand and the benefits they offer to small and medium-sized companies and potential investors.

Raising capital is undoubtedly the most important reason, and each of us knows that, but apart from that, there are many other factors that encourage SMEs to prepare to go public.

1. Best way to raise capital for SMEs

SME IPO is a well-developed and SEBI-regulated mechanism for raising capital for growth and expansion. This is undoubtedly the best way to raise much-needed capital for business growth.

Listing SME shares on one of the two stock exchanges (BSE SME or NSE Emerge) gives small and medium enterprises access to the capital they need. The SME IPO proves to be a Gem for SMEs to have direct access to the capital market by issuing their shares to the public.

Process to issue SME IPO in India

2. Relaxed eligibility criteria and norms

Preparing for SME IPO is way simpler due to relaxed regulatory norms and eligibility criteria than preparing for a mainboard IPO, which has very strict criteria, and regulations, and requires a lot of documentation.

In every aspect, be it regarding minimum net worth, minimum track record, financial or profitability criteria, listing requirements, etc. SME IPOs are subject to less stringent norms than regular large IPOs. For example, SEBI requires at least a seven-year track record for large IPOs, while only a three-year operating history is required for SMEs. In addition, mainboard companies must have a paid-up share capital of at least Rs 10 crore to be eligible for an IPO, while companies whose post-issue paid-up capital does not exceed Rs 25 crore are eligible for the issue SME IPO. Not only pre-issuance norms but also post-issuance compliance are relaxed for SME IPOs, as they are required to submit semi-annual financial statements, while regular IPOs require companies to submit quarterly financial statements. All these relaxed norms and criteria make SME IPO an attractive platform for fundraising.

3. Better access to required capital

Access to capital from investors is the most encouraging reason for SME IPO. Every small and medium business needs money to drive growth, but lack of funds is a major challenge. Preparing for SME IPO provides them with capital by selling shares to investors. SMEs issue IPOs and raise money from different types of investors, including qualified institutional investors, high-net-worth individuals (HNIs), and retail investors. Companies can then use the capital raised to expand their business, support growth, strengthen corporate infrastructure, and diversify their product and service portfolio.

4. Enhanced Valuation

In many ways, SME IPO offers the company a higher valuation. When an SME chooses to list, it enhances the credibility of the company and provides a better valuation of the company’s stock based on current financial performance and growth potential.

Listing SME shares on the stock exchange significantly increases liquidity, as private equity investors can buy and sell the shares on the SME exchange at any time. The SME IPO is not only a means of raising equity for SMEs, but SMEs with a solid financial track record and credit rating attract potential lenders and enable the company to raise debt capital in the future.

5. Effective Brand Building

Going public helps SMEs a lot in building a strong brand reputation, but again, the question is how. An IPO involves a lot of marketing and PR activities, media coverage and analyst coverage, which results in expanding the company's reach and attracting the maximum number of potential investors. It enhances the company’s image, credibility and market presence as more investors become aware of the company. Public listing further strengthens business position in the industry and opens up new growth opportunities such as market expansion, future financing, partnerships, and more.

6. Strong Growth Potential

SMEs with strong management and robust financial performance can attract maximum investors to achieve high returns. Increasing demand and easy access to the required funding unleash great potential for SME growth and expansion. These SMEs have the potential to turn into large successful companies in the future.

As investors are aware of the untapped SME market, they are also looking for new investment opportunities to park their capital in companies with high growth potential to multiply their capital. In this respect, IPOs by small and medium sized enterprises present a lucrative investment opportunity to potential investors in thefollowing ways:

1. Early-stage Investment Potential

Unlike large companies that are already big and established in the market, MSMEs are early-stage companies that have enormous growth potential or could become the big companies of tomorrow.

The IPOs of these companies provide a great investment opportunity for all investors, whether qualified institutional buyers or retail investors like us. SMEs that operate in high-growth industries or offer particular goods or services to meet growing market demand have significant potential for expansion. As the company grows in the future, your capital will multiply in the long run.

Current SME IPOs in India

2. Helps to Diversify Investors Portfolio

Diversifying the portfolio is important for risk management. Betting on SMEs is no doubt risky, but it also offers high potential returns. Therefore, investors can invest in SMEs to diversify their portfolio across different asset classes, market capitalizations, and sectors and reduce the overall risk of their investment.

3. Investment in High Growth Sectors to get high returns

Companies operating in the SME segment often come from high-growth sectors such as consumer goods, healthcare, technology, etc., and have tremendous growth potential. These companies can attract maximum investors, and investors also have access to high-growth sectors and benefit from the companies’ growth stories themselves.

4. Easy Entry and Exit Route

As SMEs go public and list shares on the SME Exchange, liquidity for the company increases. Investors can buy and sell listed SME shares on the stock exchange at any time. This provides them with an easy entry and exit route.

Bottom Line

SME IPO is not only the best way to raise capital for small and medium-sized businesses but also provides a lucrative investment opportunity for potential investors. Companies gain access to capital, better brand awareness and build a strong brand image, while investors can invest in SME stocks with high growth potential at an early stage to achieve good long-term returns.