IPOs remain a sound forward move for all SMEs

Small and Medium-sized Enterprises (SMEs), together valued at $one trillion, account for a significant portion of economic activity, particularly in emerging markets like India, where we have around 633.9 lakh MSMEs. Of them, over 99 per cent qualify as micro-enterprises that make up for 630.5 lakh enterprises. They are often more nimble and innovative than larger companies, driving competition and productivity growth. Such companies also create jobs, support local communities and reduce unemployment ratio. SMEs refer to a business that falls within a certain size range in terms of employees, revenue or assets. Generally, smaller-scale businesses, compared to larger corporations, may vary in their specific criteria for classification as an SME by a country. Although they play a crucial role in the economy, they themselves are faced with innumerable problems with limited access to capital being the foremost hurdle. Towards this, SME IPO has emerged as an essential tool for them to access capital and increase visibility. These offerings are regulated by stock markets and are designed to meet the specific needs of SMEs.

While a normal or mainboard IPO requires the company to adhere to specific guidelines regarding the size of the company, SME IPOs have more relaxed guidelines, enabling even smaller companies to directly access capital from the public in the stock market. Going by statistics from BSE and NSE, nearly 464 SMEs have so far raised Rs. 5727 crore equity capital on the BSE platform, while their overall market capitalization has grown to Rs. 97,488 crore. Similarly, around 234 SMEs have raised Rs. 3,100 crore on the NSE platform and their market capitalization has exceeded Rs. 8,000 crore because of strong investor interest in SMEs showing promising business prospects. Last year saw them break records with 156 IPOs that helped raise more than Rs. 4,200 crore. The average ticket size in SME IPOs increased from Rs. 13 crore in 2021 to Rs. 18 crore in 2022 and Rs 25 crore in 2023. SMEs, generating profit at least in the last two years, can go for IPO to dilute the shares of promoters, reduce debt, invest in new projects or build a war chest for mergers and acquisition.

Let us now take a closer look at why SMEs should opt for IPOs for raising funds or what gains await them by taking the IPO route to raise capital. Even as a general business strategy, access to capital is crucial for SMEs to fund their expansion plans, invest in technology, and explore new markets. SME IPOs come as godsend opportunities in this regard. Going public through an IPO significantly enhances a company's visibility and branding. SMEs that successfully list on the stock exchange gain recognition, credibility and increased visibility among potential customers, partners, and investors. This increased visibility can open doors to new business opportunities. It can even attract strategic partnerships. SME IPOs not only benefit the issuing company but also offer investment opportunities to retail and institutional investors. More importantly, SMEs can enhance their credit rating, corporate governance, financial discipline, branding and market perception on getting listed.