It’s been raining IPOs (Initial Public Offerings) in India! In recent years, apart from mainboard IPOs, there has also been a noticeable surge in IPOs from small and medium-sized enterprises (SMEs). More than 117 SMEs have already launched IPOs in 2024, showing increased interest from both companies and investors. Once considered a risky investment by most investors, SME IPOs are now catching the attention of market participants. These IPOs allow small businesses to grow through capital raised from the public, and for you, as an investor, they offer the potential for significant returns.

So, what’s fuelling this rise in SME IPOs? Can we expect this trend to continue? Let’s find out.

What is an SME IPO?

An SME IPO involves a small or medium business raising funds by offering its shares to the public via stock exchanges. Many SMEs find it challenging to get loans for business expansion. This makes the IPO route an important way for such businesses to grow faster. Besides raising money, an SME IPO also helps the company gain more visibility by reaching a larger investor base.

For investors like you, SME IPOs provide an opportunity to diversify your portfolio. Since these companies are smaller and have the potential for growth, they can be an appealing option if you're looking for long-term investment opportunities.

Why SME IPOs are Rising

Several factors are contributing to the growth of SME IPOs in India:

1. More Investor Interest: Over the years, more investors have gained interest in SME IPOs due to their potential for higher returns. Investors are increasingly looking beyond traditional large-cap companies for opportunities in smaller, fast-growing businesses.

2. Simpler Listing Process: SEBI (Securities and Exchange Board of India) has also simplified the listing process for SMEs. These changes make it easier for small businesses to go public.

3. Growth of Online Trading: The growth of online trading platforms has also made it more convenient for investors to access IPOs, including SME IPOs.

4. Strong Market Sentiment: The Indian economy has also been on a positive growth trajectory. This, combined with the success of many recent SME IPOs, has created a positive market sentiment.

Role of Retail and Institutional Investors in SME IPOs

Stock market participants are constantly on the lookout for opportunities to generate wealth. If you are well-versed with the markets and go through the details of an IPO, you can estimate whether there is a potential for listing gains, short-term or long-term gains. As companies, including SMEs, continue to enter the bourses through IPOs, there are multiple opportunities to create wealth.

Retail and institutional investors play a key role in the success of SME IPOs. SMEs are seen as the backbone of Indian economy, contributing significantly to the country’s growth. Therefore, when such companies come out with IPOs, they may present good investment opportunities.

Institutional investors, such as mutual funds and insurance companies, also participate in SME IPO bids. This further adds credibility to such offerings. Their involvement encourages more retail investors to invest in SME IPOs.

The Impact of IPOs on SME Growth

For SMEs, launching an IPO is a big step towards growth. It helps them raise funds to expand their business, reduce debt, or invest in new technologies. Additionally, going public increases their credibility, making them more attractive to both customers and investors.

You may have noticed that some SME IPOs get large subscriptions, often more than what the company originally planned to raise. This is an indication of how much investors believe in the growth potential of some of these small businesses.

Challenges Faced by SMEs in the IPO Market

While IPOs offer significant benefits, SMEs continue to face certain challenges when entering the stock market.

1. One of the main challenges is the high cost involved in going public. Legal and regulatory costs can be substantial for small businesses to shell out.

2. SEBI’s strict reporting requirements may further add to the complexity that small businesses have to face. This can be especially challenging for companies that do not have necessary resources.

Additionally, SME stocks often have lower liquidity, meaning it can be harder to buy or sell shares quickly. This makes investing in SMEs riskier compared to larger companies.

Conclusion

SME IPOs are transforming the investment landscape, offering new opportunities for both businesses and investors. While they come with the potential for high returns, they also involve risks. It’s important to understand these risks and evaluate each SME’s financial health before investing.

You can explore and learn more about SME IPOs and other investment opportunities by visiting Sharekhan. It offers valuable resources to help you make informed decisions and explore upcoming IPOs.