Since 2017, IPOs of Small and Medium Enterprises (SMEs) have taken off in popularity, coinciding with the bull market we’ve been seeing in the Indian markets.
This year alone, 162 SMEs have raised over ₹5,700 crores from Indian investors in just eight months Also, in 2020, there were only a couple of SME IPOs each month. Now, we’re seeing more than ~20 a month.
Increasing demand is good for SMEs as they face huge challenges in getting access to capital. This is also why, in 2012 BSE and NSE launched separate platforms for SME companies to IPO and raise money.
However, investing in these small businesses carries inherent risks. There is often limited information available beyond what the companies themselves provide. Additionally, these companies are not subject to the same level of scrutiny and compliance requirements during IPOs as larger companies.
This makes it easy for actors with perverse incentives to take advantage, and there have been countless such examples. We talked about this in today’s edition of The Daily Brief newsletter.
To improve the quality of companies listing in the SME segment, NSE and BSE have been making several changes. In July, NSE imposed a cap on the listing gains of SME IPOs at 90%. BSE already had this in place.
Recently, NSE added a new rule: SMEs applying for an IPO must be cash flow positive for at least two of the last three financial years before they can go public.
While this will help, as an investor, it is also important for you to do your due diligence before investing instead of giving in to FOMO (Fear Of Missing Out).
We also show the following note for SME IPOs, warning investors about risks before applying for an IPO.
