March 2012 saw a new chapter unfold in Indian equities, The securities and Exchange Board of India (SEBI) rolled up its sleeves and initiated a slew of changes in the listing norms for Small and Medium Enterprises (SMEs). SMEs represent over 90% of the total businesses in India comprising of almost the entire middle class in the country. Regulatory changes boostedtheir inclusion in the financial world, providing them with an opportunity to raise equity and leverage on the growing investor base in India. The National Stock Exchange (NSE) & the Bombay Stock Exchange (BSE) both launched separate SME platforms to help these companies tap capital markets, sowing seeds for what will become a seperate industry in itself. Fast forward to 2023, we saw the fruits in their fullest – 179 companies listed on the SME platform with 117 (65%) giving a return of more than 24% from their listing price, 67 companies (37%) giving more than 100% return from their listing price, generating thousands of crores in shareholder wealth and fuelling the SME engine across the country which is arguably the backbone of any emerging economy.
A country that thrives on entrepreneurial spirit, the SME sector holds a lot of importance. Job creation, innovation, income generation, regional development, industry growth, increased competitiveness are few obvious benefits of a dynamic SME sector. They often operate in narrow markets and create distinctive items utilizing exclusive methods; their competitive advantages are more often attributed to the quality, total cost of ownership, excellent performance, and tight client relationships than to cost leadership. Such characteristics make them unique and vital to the economic machinery in any country.
Since 2012, pushing the SME IPO market has been transformative, apart from fund raise, listing SME is a big validation of small business owners. It symbolises transparency in a sector that is often perceived as grey and far away from being a part of the structured finance world. By democratising access to capital for small businesses, enabling them to tap into public funds , they are able to realise their growth potential like never before. With increased investor scrutiny, SMEs are guided towards better corporate governance and accountability which are essential for sustained growth.
What it means for investors?
In early 2021, I was analysing a mutual fund portfolio (equity) that was spread across 13 schemes and 6 different AMCs. Upon risk assessment, we observed that 36% of the total investment had exposure to the financial sector alone and top 13 bluechip companies like Reliance, TATA Steel, Infosys, TCS, HDFC, Bajaj etc were common across all the schemes. While the investors would assume diversification to their portfolio across 13 difference funds, underlying assets are same hence posing a concentration risk in both sector and stocks. Asimilar assessment across all my clients’ portfolios showed the same result. While the campaign ‘Mutual Fund sahi hai’ was doing well to increase participation, the supply side remained weak. In the same year, surprisingly, mutual funds such as SBI Small & Midcap Fund, Mirae Asset Small Cap fund put restrictions on the inflow and stopped accepting additional funds. The fund managers citied ‘lack of investment opportunity’ and ‘over valuation of existing stocks’ as the main reasons.
With the SMEs accessing capital markets, Investors now have a whole new crop of companies to invest in. It has help them diversify portfolios, avoid concentration risk, become an active part of the India growth story at root level and enhance returns. This match making of investors to companies has been a win-win for all and created an ecosystem that is feeding off capital to grow and thus benefiting everyone along the way. Fund managers have access to more stocks and are able to judicially allocate funds through MFs and PMS schemes. There are only 483 companies listed on the SME exchange and 410 of them are valued below Rs. 2000 Crores; this provides a huge opportunity and along runway in this sector. The untapped growth potential in terms of new entrants and existing ones growing into Mid-cap companies is huge and exciting.
Going forward, rise of SME IPOs is a new chapter in Indian stock market and golden era in our emerging economy. Inclusive growth in any country forms the backbone of a robust financial and social structure. The mutually beneficial ethos which forms the very basis of the stock market is being utilised at its best. SEBI has been working on further simplifying the listing process and reducing compliance in order to foster confidence and make it easier for them to navigate the world of finance. What was always the backbone of our economy is also becoming a gateway of opportunities for millions who are just about starting their stock market journey.
Kush Gupta
Director- SKG – Investments & Advisory
