Exploring the Rewards and Risks of India's SME Listings

The Indian Small and Medium Enterprise (SME) market is experiencing a surge in Initial Public Offerings (IPOs), attracting significant investor interest and generating impressive returns. This article explores the current state of the BSE and NSE SME segments, highlighting key trends and performance indicators.

When did it all start?

The BSE SME platform was launched by the Bombay Stock Exchange (BSE) on March 13, 2012. This platform was specifically designed to facilitate the listing and trading of shares of small and medium-sized enterprises in India. Similar to the BSE SME platform, NSE Emerge was launched by the National Stock Exchange (NSE) on September 18, 2012 to support the growth and development of SMEs by providing them with a platform to list and trade their shares.

Objectives of BSE SME and NSE Emerge Platforms

• Access to Capital: Facilitate easier access to equity financing for SMEs to support growth, expansion, product development, and working capital needs.

• Enhanced Visibility and Credibility: Increase the visibility and credibility of SMEs, attracting more investors, partners, and customers through listing on a reputed exchange.

• Liquidity for Shares: Provide a mechanism for the trading of SME shares, offering liquidity to investors and making the shares more attractive to both institutional and retail investors.

• Corporate Governance and Compliance: Improve corporate governance standards and business transparency by adhering to the listing requirements and regulatory standards of the platforms.

• Investor Confidence: Build investor confidence in the SME sector by providing a regulated and transparent trading environment.

• Growth and Expansion: Support the overall growth and expansion of SMEs, contributing to the development of the SME sector in India by providing access to capital, increased visibility, and better governance practices.

A Flourishing Landscape

• BSE SME: As of date, 322 companies are listed on the BSE SME platform, with a combined market capitalization of Rs. 55,771.85 crore. The platform has seen a total of 507 companies listed since its inception, raising a total of Rs. 6,671.27 crore. Notably, 185 companies have successfully migrated to the main board, demonstrating the potential for growth within the SME sector.

• NSE SME: The NSE SME segment has also witnessed substantial growth, with 322 companies listed to date.

Attractive Returns for Investors

The BSE SME IPO index has delivered exceptional returns to investors, showcasing the potential for strong growth and value creation:

• 5 Year Return: 5,190%

• 1 Year Return: 263%

• Year-to-Date (YTD) Return: 99%

• Since Inception Return: 92,247%

These impressive returns demonstrate the appeal of the SME IPO market, particularly for investors seeking high-growth opportunities.

Recent Trends

• Increased IPO Activity: In 2024 alone, 130 companies have gone public, a remarkable 76% of these being SME listings. This signifies a growing trend of SMEs seeking capital through IPOs.

• High Subscription Rates: Over 57% of the 99 SME IPOs in 2024 saw subscription rates exceeding 100%, highlighting the strong investor appetite for these offerings. Companies like HOAC Foods India (1834 times) and Kay Cee Energy & Infra (959 times) garnered exceptional interest.

• Top Performers: Several SME IPOs have delivered phenomenal returns to investors, with Owais Metal and Mineral Processing standing out with a 1348% gain from its issue price. Other notable performers include Australian Premium Solar, Alpex Solar, and Pratham EPC Projects, all experiencing significant gains.

• Underperformers: While the majority of SME IPOs have performed well, a few have struggled, such as MVK Agro Food Product which is currently trading 63.6% below its IPO price.

Mainboard Migration Guidelines

Last year, the BSE implemented new guidelines for SME companies seeking migration to the main board, aimed at ensuring higher quality and greater investor protection. Key requirements include:

• Net Worth: A minimum net worth of INR 15 Cr. in the preceding two financial years.

• Listing Period: A minimum listing period of three years on the SME platform.

• Public Shareholders: A minimum of 250 public shareholders.

• Profitability: Positive operating profit for at least two out of three financial years and positive profit after tax (PAT) in the immediate financial year preceding the migration application.

Risks involved when investing in the SME segment

• Limited Availability of Information: Financial data and general information for SME companies are typically released on the NSE/BSE exchange only annually or semi-annually. This infrequent disclosure presents challenges for investors. As the lack of comprehensive, up-to-date details hinders thorough company analysis and potentially leading to speculative decision-making.

• Less Liquidity: Due to the high-ticket investment amount of over INR 1 Lac, the daily liquidity is relatively less than the mainboard stocks. This leads to higher bid-ask spread and lower flexibility.

• Fewer Disclosures: The companies listed under the SME segment are subject to fewer compliances and disclosures. This can lead to short-term manipulation and accounting fraud.

• Oversubscription and Overvaluation: 90% of the SME IPOs listed in 2024 were oversubscribed by more than 2 times and 10% were oversubscribed by over 50 times. This kind of hype leads to the SME listing at an unjustified premium over IPO price and therefore a overvaluation of the company.