Credit and finance for MSMEs: Since the establishment of BSE SMEs and NSE Emerge in 2012, over 800 SME IPOs have been successfully listed, and this trend continues to grow.
Credit and finance for MSMEs: In recent years, there has been a significant increase in the number of Small and Medium Enterprise (SME) IPOs in India as businesses have begun to recognize the advantages of raising equity funding. SME IPOs refer to the capital raised after listing, typically ranging from Rs 3 crore to Rs 50 crore. These IPOs are listed on the Bombay Stock Exchange (BSE) SME and National Stock Exchange (NSE) Emerge platforms.
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In 2022, these exchanges witnessed 109 IPOs, raising a substantial amount of Rs 1,980 crore. Comparatively, in 2021 and 2020, there were 59 and 27 SME IPOs, respectively. As of June 2023, 76 SME IPOs have already been filed, indicating a positive shift in this trend. The question is, what has changed? Why are an increasing number of SMEs opting for IPOs to support their debt and alternative financing options?
Traditionally, SMEs faced limited options when raising funds. They could either invest their capital or rely on loans. However, using personal funds has its limitations in the long run, and loans often come with conditions such as collateral requirements, ongoing interest expenses, and restrictions on using funds for essential areas such as marketing or research and development (R&D). Additionally, taking on debt can burden the balance sheet and impede business growth, especially during challenging times.
Recognizing these challenges, SMEs have started exploring alternative funding options, including equity financing. One such avenue is the SME Initial Public Offering (IPO), which offers several benefits and allows businesses to democratize capital and unlock their growth potential.
Let’s delve into how SME IPOs can be advantageous for these enterprises.
Capital Funding and Valuation
One of the most evident advantages of taking a business public is access to capital funding and the potential for valuation growth. SMEs can unlock their growth potential by utilizing the funds raised through an IPO for various purposes that they may have reservations about otherwise.
For instance, they can allocate funds towards research and development (R&D) initiatives or invest in marketing and brand building, which can significantly contribute to their overall growth trajectory.
Furthermore, raised capital can often give a business 2x-3x leverage in debt fund raise.. For example, if an SME successfully raises Rs. 5 crore through its IPO. In that case, it can potentially leverage its balance sheet by approximately Rs. 10-15 crore (considering various factors) while seeking additional debt funding. This leverage can offer SMEs additional financial flexibility and resources to support their expansion plans and meet their growth objectives.
Unlike traditional debt financing, the capital raised via an IPO does not impose fixed repayment obligations or incur interest expenses. It alleviates the stress and burden on SMEs, allowing them to focus on their core business operations and growth strategies. By removing the pressure of repaying debts within defined timelines, SMEs can direct their attention towards maximizing expansion opportunities and driving business growth. Simultaneously, investors have the potential to benefit from capital appreciation over time, providing them with returns on their investments.
This favourable scenario gives SMEs peace of mind and the freedom to concentrate on crucial aspects of their business, such as product development, market penetration, and operational efficiency. By utilizing the raised capital effectively, SMEs can enhance their competitive position, increase market share, and drive sustainable growth in the long run.
It is important to note that while capital funding and valuation growth are significant benefits of going public, SMEs should carefully consider their financial goals, business strategy, and the associated costs and obligations of being a publicly listed company.
Proper planning, compliance with regulatory requirements, and effective communication with investors are essential for maximizing the advantages and outcomes of an IPO. Seeking guidance from professionals, including investment bankers and legal advisors, can help SMEs navigate the complexities of the IPO process and optimize the capital funding and valuation benefits it offers.
Facilitates Brand Building
The BSE SME and NSE Emerge are reputable exchanges providing valuable visibility opportunities for businesses operating in various industries. This aspect proves particularly advantageous for consumer-facing SMEs. By getting listed on these exchanges, SMEs can establish their brand presence in the market and gain a competitive edge over their rivals.
For instance, let’s consider a local motor manufacturing company primarily recognized in its regional market. However, by listing on an exchange, this SME has the potential to garner nationwide visibility. Such increased exposure empowers the business to expand its reach, tap into new markets, and drive revenue growth.
Remarkably, this benefit is attained without incurring additional expenditure, making it an attractive proposition for SMEs seeking to enhance their brand recognition and market position.
Strengthens Internal Compliance
While SMEs may already have internal accounting compliance measures in place, going public also necessitates adherence to exchange regulations. It entails aligning the balance sheets and other financial reports with the exchange’s specific requirements.
For instance, an SME must diligently prepare and submit financial reports, company audits, and compliance reports to pursue a listing on the exchange and undergo IPO vetting. Moreover, they must compile various acts, including the Companies Act, to ensure regulatory compliance.
Furthermore, periodic compliance obligations arise after successfully listing, including event-based reporting, semi-annual disclosures, and annual compliance requirements, which must be diligently adhered to.
The heightened focus on compliance compels SMEs to maintain transparency and discipline within their internal operations. By adhering to the exchange’s reporting requirements, SMEs gain valuable insights into their financial standing, such as year-on-year revenues, cash flow analysis, and potential future challenges. It enables SMEs to make informed and forward-thinking decisions, leveraging a comprehensive understanding of their financial performance and potential risks.
By strengthening internal compliance measures, SMEs can enhance their organizational discipline, instil transparency in their financial reporting, and foster a culture of regulatory adherence, which, in turn, contributes to greater investor confidence and reinforces the overall credibility of the SME in the market.
SMEs need to recognize the importance of maintaining accurate and up-to-date financial records and complying with the ongoing reporting obligations set by the exchange. Seeking professional guidance and employing robust accounting and compliance systems can aid SMEs in effectively managing their internal compliance requirements and ensuring timely and accurate reporting to meet the exchange’s standards.
Bottom Line
While mainstream IPOs remain more popular among investors, SME IPOs are gaining traction in India. Since the establishment of BSE SMEs and NSE Emerge in 2012, over 800 SME IPOs have been successfully listed, and this trend continues to grow.
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However, the process of conducting an SME IPO can present challenges for SMEs. Complying with the necessary procedures and accurately determining the appropriate value for the IPO can be complex. Additionally, finding the right merchant banker to assist with the process is crucial. Businesses should seek the expertise of financial professionals who can oversee the entire procedure and help overcome these challenges and ensure optimal results. These experts can assist with various aspects, including valuation, book building, and the listing process, ultimately assisting SMEs to unlock their maximum potential and facilitate growth with ease.
