Initial Public Offerings: Why Retail Investors Should be Wary of SMEs IPOs
Date Published: November 17, 2023
What is SME IPO?
SME IPO is a Small and Medium Enterprise (SME) IPO. Stock exchanges offer SMEs a lateral entry into the stock market through SME IPOs. It is an opportunity for promising companies to attract investments. An SME IPO is a way for a privately owned Small and medium enterprises (SME) company to sell its shares to the public for the first time and gets listed at BSE SME or NSE Emerge platform. Companies with minimum post-issue capital of Rs 1 crore and a maximum of Rs 25 crores are eligible for SME IPO in India. Approximately 360 SMEs have opted to be listed in BSE through the SME IPO route, while NSE reports that around 247 such companies are listed on its platform.
Initial Public Offerings (IPO) is the process by which a private company can go public by sale of its stocks to general public. It could be a new, young company or an old company which decides to be listed on an exchange and hence goes public. Initial Public Offering help a company raise money through the issue of public shares. After the IPO, the company gets listed on a stock exchange, and its shares become freely trade able in the market. In recent years, investors in India have shown a keen interest in IPOs, with many IPOs posting remarkable oversubscriptions.
Under these new rules, Additional Surveillance Measures (ASM) and Trade to Trade (T2T) regulations will now apply to companies in the SME segment. This decision was made after deliberation with stock exchanges. Previously, these rules only applied to mainboard companies.
Why SEBI has implement these new rules?
ASM, which stands for Additional Surveillance Measure, is a method or measure of additional scrutiny placed on shares. ASM is an initiative by the stock market regulator SEBI and stock exchanges. It is implemented to safeguard the interests of investors. ASM concerns are based on parameters like price, volume, and volatility changes. There are two types of ASM: Long Term (LT-ASM) and Short Term (ST-ASM).
Why a stock is included in the ASM list?
ASM list means that the exchange is warning investors about unusual price movements in that stock. This step aims to reduce or control the volatility in that particular stock. Now, let’s delve into the T2T framework. T2T, or Trade to Trade, is a regulatory framework. It is used to monitor and control the trading of shares, especially those with excessive speculation or illiquidity. In the T2T segment, trading cannot happen, meaning you can only either buy or sell in a day.
New rules have been introduced:
This year, in 2023, SME Company IPOs have gained significant traction. A total of 135 SME company IPOs have been listed, while in the mainboard segment, which includes larger companies, only 33 IPOs have taken place. Since its inception in 2012, SME companies have raised the highest amount of funds in a year. In the past decade, since its inception in 2012, the BSE SME Index has seen an approximately 350-fold increase. Despite several years of rapid growth, this index has surged more than 2-fold in just the past year. Furthermore, in recent months, several IPOs of SME segment companies have received a tremendous response. Companies like Madhusudan Masala, Basilic Fly Studio, Drone Destination, Oriana Power, and Hi-Green Power have garnered significant retail investor enthusiasm. Arun Mantri, the founder of Mantri FinMart, believes that there is significant speculation in SME company stocks because they tend to be illiquid and often have no circuit limits. With the implementation of new rules by SEBI, such speculation may decrease. It’s possible that more regulations may be introduced for this segment in the future.
Whether investing in SME Company IPOs is an easy and cost-effective path to success or a market filled with speculation?
It’s not that all SME segment companies are bad. About 5-10% of these companies have strong fundamentals. However, achieving returns similar to those seen in the past 3-4 quarters may be challenging in the next 3-4 quarters. In the next week, 10-12 companies are coming up with their IPOs, indicating that companies want to capitalize on the euphoria among retail investors. Ideally, retail investors should consider investing in IPOs of mainboard companies or large-cap shares. If we are determined to invest in SME companies, consider three key factors: a long company history, profitability, and a sector with earnings visibility for the next 4-5 years. Overall, not all SME companies are bad, but only about 1 in every 10 may be a good investment. Therefore, don’t invest in any company blindly, especially based solely on the IPO market’s enthusiasm. Before investing in any SME company’s IPO for the next 3-4 quarters, exercise extra caution, as regulations may become stricter.
Difference between SME IPO and Main board IPO.
| SME IPO | Mainboard IPO |
| Post-issue paid up capital of SME companies should be between Rs. 1 cr – Rs. 25 cr. | For mainboard IPO it is minimum Rs. 10 crore. |
| Application size is greater than Rs. 1 lakh for 1 lot. | IPO underwriting is not mandatory (Under 50% compulsory subscription to QIB’s) |
| Stock exchange vets the offer document. | SEBI vets the offer document |
| 3-4 months of IPO time frame | 6 months of IPO time frame |
| Can’t sell shares individually. Need to sell the entire lot. | Can sell shares individually on the secondary market. |
| Companies need to half-yearly report mandatorily. | Companies need to Quarterly report mandatorily |
| Minimum No. of allottees should be 50. | Minimum No. of allottees should be 1000. |
Impact of SME IPO
SEBI is about to extend leniency to startups so that they can enlist on the SME platform and state their requirements of net worth and profitability. The principle that dictated this step was a desire to provide more opportunities to modest startups that are unable to list on the main board. Numerous startups need capital for growth. While major startups have multiple options like taking the aid of private equity investors to get more funds, the small ones have fewer options available. In this case, a platform created with such companies in mind would help both these companies as well as the investors immensely.
While the companies listed on the SME platform are becoming more influential, they are attracting more investors. Another reason for an increase in the number of investors who invest in SMEs is the rapidly multiplying number of SME stocks and increased returns. With such support from the exchange board and the investors, the Indian market seems to be good for SME-IPOs. In India, such SMEs are important for the growth of the nation, and increased employment opportunities. after allotment, the company’s shares are listed on the exchange and can be freely traded by investors.
Conclusion
With this, we are aware of the meaning of SME IPO, its various features and the kind of impact it has left. The number of SMEs going for IPOs has been steadily on the rise, with the momentum likely to hold steady in the future.