😲 SME IPOs Giving 600% Returns?
Mainstream IPOs may have slowed down but SME IPOs have picked up pace and are making investors richer. Here's an explainer on what they are.
2021 will probably go down in history as the year of the IPO frenzy in India, with 63 companies raising a record Rs. 1.2 lakh crores.
But investors collectively lost Rs. 1.3 lakh crores, as the stocks of these companies tanked soon after.
So, people are no longer super enthusiastic the way they were before.
This year, 51 IPOs have raised Rs 38,155 crores, down from Rs 64,768 crores through 55 issues last year.
However, a different kind of IPO is doing super well: SME IPOs. Wondering what that is? ReadOn!
🤔 What are SME IPOs?
SME IPOs are similar to regular IPOs, but, a little bit more lenient (you can read more about IPOs here).
You see, under the current SEBI rules, a company must have a post issue paid-up capital (how much money the company has after the IPO has happened) of Rs. 10 crores.
Because of this a lot of small and medium enterprises cannot list on the stock exchange (because of their size they may not be able to garner an amount of this size).
But even these companies require regular cash infusions to function.
Getting this cash from banks or NBFCs can be super difficult due to a lack of credit history or high interest rates.
Which is why Indian MSMEs are facing a credit gap of Rs. 20-25 lakh crores!
Listing on the stock exchange could solve this problem for SMEs.
So, the BSE and the NSE came up with the BSE SME Exchange and NSE Emerge.
These platforms have slightly different rules which allow SMEs to list on them.
📜 Rules For SME IPO
Okay, but why create separate platforms and different rules for SME IPOs?
Why not just make the rules for listing directly on BSE and NSE simpler?
Well, that’s because investing in these SMEs could be super risky.
You see, these small companies often don’t have the money to implement tech and other resources that can help them manage business efficiently and scale up fast.
Surveys also show that a lot of these businesses don’t even have basic insurance policies or bankruptcy protection.
And unlike major companies and startups they don't have investors or VCs backing them.
So, even a small downturn could become a huge problem for these companies.
Now, if BSE and NSE allowed them to list with other more financially sound companies, it could open up retail investors to a huge risk.
Which is why they allow these companies to enter SME exchanges where they can raise funds from those who have a higher risk appetite.
But wait, if these companies have a higher chance of going under, why invest in them at all?
Because these high-risk investments often provide super-high yields.
📈 The Performance of SME IPOs
72 SMEs have listed on the stock exchanges so far this year.
Out of them 18 have turned multibaggers*, doubling and even tripling investors' wealth.
And this isn’t a new thing.
Out of the 55 SME stocks listed last year, 33 are trading above issue price!
So, should you go and invest in SME stocks ASAP?
The answer isn't a plain yes or no. Do your research thoroughly (which is true for any investment) because 28 SMEs that listed this year are trading below their offer price, highlighting just how risky this space can be.
🔍 The Need to Boost SME IPOs
Surveys have shown that listing on stock exchanges is super helpful for SMEs.
But public participation in SME IPOs is still very low.
This could be due to the high risk involved.
However, Indian investors have shown that risk is not something that stops them from investing – over 15% of Indians invested in cryptocurrencies (this number may seem small but only 1.2 crores Indians actively invest in the stock market).
So, what is stopping investors? The higher ticket size or just a lack of knowledge?
If more noise was made around this space, would we see higher participation? And would that be a good thing for retail investors?
Though we don’t have the answers to these questions right now, what we do know is that SMEs account for 27% of our GDP.
So, this sector should not have to struggle for funding.
Though the government is taking several steps to ensure that, only time will tell if they will be enough to solve this problem.
P.S. We've curated a list of recent SMEs that went public or are planning to do so. Here's the link.
🤓 Noob's Corner: IPO underwriting is a process through which an investment bank helps a company understand what the price of their shares should be and also helps them sell a certain number of shares.
Multibagger is a stock that gives returns that are worth several times its price.
⚡In a line: SME IPOs can help small companies survive and boost our economy but they are still too risky.
💡Quick question: What measures can be taken to make SME IPOs safer?
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