There are almost five crore SMEs in the country and many of them have started to approach the IPO markets in the last 4 years once the necessary regulations and guidelines were put into place by SEBI for the listing of such entities after seeing the success of such Alternative Platforms in UK and other financial centers. Both the BSE and NSE unveiled their respective SME platforms in 2012 and have since been aggressively pitching the segment to SMEs.
In order to provide capital market access to the SMEs, stock exchanges established a separate platform for them via which they can come up with an Initial Public Offer (IPO)s : Bombay Stock Exchange BSE, offers a platform called ‘BSE SME’ while National Stock Exchange (NSE), offers ‘SME EMERGE’ for SMEs.
The platform provides opportunity to SME entrepreneurs to raise equity capital for growth and expansion. It also provides immense opportunity for investors to identify and invest in good SMEs at an early stage.
NSE Emerge is now the largest SME exchange of India by way of fund raising and market cap, while BSE is leading in number of listed companies. Currently, 241 stocks are listed on BSE, and 148 on NSE.
Criteria for listing of SMEs on the exchange
- The net tangible asset of at least Rs. 3 crore, as per the latest audited financial statements.
- Net worth (excluding revaluation reserves) of at least Rs. 3 crore, as per the latest audited financial statements.
- The post issue paid up capital of the company shall be Rs 3 crore
- Companies shall mandatorily have a website
- The company shall mandatorily facilitate trading in demat securities and enter into an agreement with both the depositories.
- Companies should have at distributable profits in terms of Section 124 of the Companies Act 2013, least two years of our immediately preceding three financial years (excluding extraordinary income).
- For SME IPOs, as per SEBI guidelines, minimum trading lot varies from 100 to 10000 depending upon the price band of the issue. Such lots are reviewed periodically and adjusted depending upon it’s price movements, post listings.
132 SMEs raise ₹1,785 crore in 2017, whereas in 2016, 66 companies raised ₹540 crore through the IPO route. To date, more than ₹3,750 crore has been raised by listing on the NSE Emerge and the BSE SME. Last year, the market-cap of the two SME platforms had more than doubled to ₹11,290 crore from ₹5,343 crore in 2016.
Image Source: Economic Times
While the listings were typically the reserve of HNIs, especially Gujaratis, well known institutional investors and UltraHNIs have started showing interest in these since 2017. In the recent past, fund houses like HSBC Mutual Fund, DSP BlackRock Mutual Fund and Sundaram Mutual Fund, among others, have invested in the IPOs of at least eight SMEs. Incidentally, there have been a few instances of foreign institutional investors also bidding in such IPOs in recent times.
The interest arises from the perception that some of these stocks may be giants in the making and its better to invest into them while they are ultra small and guide them to become tomorrow’s midcap multibaggers! Plus the paucity of ideas on the main board and exceptionally high valuations also may be playing a role in diverting funds here.
Also, while the companies that listed on the main board saw listings allowing promoters to exit (83 percent of funds were raised through offer for sale), smaller firms mainly mopped up capital for their business. More than 80 percent funds raised on the SME platform came by issuing fresh shares, where the proceeds went to the companies.
How it benefits SMEs
SMEs gain on many fronts by listing on an exchange platform. They get to clean up their balance sheets and improve their credit rating, which in turn lowers their bank finance cost; they also get to raise short-term finance by pledging equity and gain respect of being a “listed company”.
SME needs most of its fund for research and innovation and might not have the right credit history to be worthy of institutional credit. Moreover, banks are not ready to give them loans for what they feel is too risky. So this risk will is now transferred to those subscribing for the primary issue.
Not a very well known track record of the company, its tiny size , unpredictable promoter behavior can throw up potential risks for investors and makes this style of investing a very high-risk-high-return opportunity.
Almost 50 per cent of the SME IPOs which grabbed the headlines last fiscal for being subscribed multiple times are trading below their offer price, raising questions on their valuations. Some others which have succeeded have in turn provided returns from anywhere between 47% to 1000%!
Also, the SME listing norms are also much less stringent than for bigger companies -SMEs get their offer documents reviewed only by the relevant stock exchanges and not by Securities Exchange Board of India (Sebi). They need to disclose half-yearly results instead of quarterly results, and it is not mandatory for them to publish results in newspapers. Fewer disclosures would mean higher risk for the market.
Finally, there is the issue of poor liquidity, which prevents investors from buying and selling stocks when they want. While 100 of the issues are underwritten and Merchant bankers themselves underwrite 15 percent of the issue, the liquidity is always not present as pricing becomes subjective. Also the lot sizes are minimum Rs 1 lakh – which makes the volatility in prices very big for smaller investors.
How to apply in SME IPO?
The application procedure of the SME IPO is the same as that for a normal IPO. Please contact our Relationship Managers or our IPO Desk directly for application forms or procedures or write to us at email@example.com for assistance.
Where can I see performance of SMEs
In NSE, stocks listed in EMERGE are available in the ‘SM’ category (National Stock Exchange of India Ltd. > Live Market). In BSE, stocks listed in SME are available in the ‘M’ category (Welcome to SME Platform > Markets > SME Streamer)