The year 2023 turned out to be an IPO year for the stock markets with new listings reaching record highs with oversubscriptions for most offerings. In total 243 companies were listed on Indian bourses, highest in last six years, while globally no of IPOs fell by 16%. What is more interesting is that SME IPOs accounted for 75% of the new listings, while main board IPO tally was 60. Investors have enjoyed good returns since covid and confidence has increased equity participation across demographics. SME IPO market is now a decade old and has enjoyed its best year so far. Both NSE and BSE have separate platforms called BSESME and NSE Emerge that have been actively providing access to investors. Going forward, are SMEs creating their own space or just enjoying the spill overs from large cap? Can they continue to over-perform in the IPO market or was 2023 just a dream run that will end soon? While old school critics think that SME is a trend, I think it’s a start of a whole new segment and the party is just getting started.
Understanding the SME investor.
SME and Large Cap are significantly different in their characteristics and there is a market for both. Having been in the industry for 18 years now, I have seen a major shift in investor psyche. A decade ago, investors that would exhaust their allocation towards large cap would then invest the remaining funds to Small and Mid cap. Majority of them would stay away due to lack of knowledge or risk taking ability. Both these factors have changed in past few years, the new generation of investors is younger, they have started earning and investing much earlier in life and they don’t shy away from taking risks. Left-over capital is no longer the only source for Small and Mid companies, portfolios now have permanent allocation to this space. SME specific platforms and experts are spreading knowledge and removing the taboo, what was once considered as a highly speculative space is now a ground for the intelligent investor who can generate superior returns if he is well informed. It’s almost like a new market now that has its own buyers, sellers, opinion makers, brokers, investors and service providers. A parallel can be drawn with start-up investments. Few years ago, start up investment was meant for HNIs and sophisticated investors, today there are various avenues through which retail investors can access these investments. SME is going through a similar journey, it is a market that is much smaller albeit running successfully parallel to large caps. Like any other asset class, it has its own investment cycle of ups and down, it is a more dynamic market but just like any new market, it seems flaky in the start but is now stabilising and will eventually grow and mature and create a bigger ecosystem.
SME vs Large IPOs
The mission behind SME IPOs is to enable Small & Medium Enterprises to tap into capital markets for growth and value creation. Previously these companies had to borrow capital at exorbitant interest rates to growth their business, which was not sustainable and created a debt trap for companies. SME promoters were less informed and cagey about capital markets, but with more successes than failure, they are getting confident about the stock market and have started seeing investors as allies. So we can expect a steady supply of SMEs coming through this route. Market forces and sentiment may determine the number of IPOs or their success but as an alternate asset class, it has already established its credibility and utility in the financial world. Large cap IPOs enjoy participation from a set of investors that will probably not invest in SMEs. They have less volatility, market forces do not affect them as severely and sentiment there does not change easily. Hence both are catering to different segments and will most likely to coexist. We may see quarters where Large Cap listings will do better than SME and vice versa but Indian markets are robust enough to see both segments being active and seeing participation.
To conclude, India is seeing more asset classes being accepted and getting democratized through government initiatives and regulations. For start-ups we now have VC funds, AIFs and marketplaces. For large companies there was always IPO on NSE & BSE. Now, for SMEs, which some say are the backbone of an emerging economy, there is a dedicated place on the stock exchanges and a fully functional ecosystem that adds value to all stakeholders. Along with promoters and investors, we have Merchant Bankers, Underwriters, Investment bankers, Fund Managers, Valuation experts and many more professionals specialising in this sector that are helping it grow into an industry. India is a country with exceptional entrepreneurial spirit and this platform can be the most optimum one to see it foster.
