Like with other corporates who take the ECM or equity capital market route to raise funds, SME or small and medium enterprises since the year 2012 have followed in the practise and since then the activity has been increasing year on year sharply on the BSE SME platform in comparison to NSE Emerge.
As per experts and lead managers, these IPO issues are high risk and high return opportunities in the market and due diligence by seasoned investor class can help find multibaggers in these issues. More risk comes in as there is no track record as well as the issue size of these SME IPOs is small with low capital structure. SEBI has allowed small and medium enterprises to raise a maximum of Rs. 25 crore through the IPO route.
SEBI cap and entry barrier for this highly risky sector
To ward off too many entrants from this highly risky investment avenue, SEBI has capped the minimum trading limit to Rs. 1 lakh.
Factors to look for when betting on SME IPOs
Transparency: With no past track record as these companies are new, future prospects is hard to determine. More so unlike other peers, they come up with financial results and shareholding pattern annually instead of the quarterly announcements.
High capital involved: An investment amount of Rs. 1 lakh means a significant stake on an investor. And with limited investors trading volume in these SME IPO stocks is also low which is maintained to some degree after listing but soon is on a declining trend.
Return of S&P BSE IPO index vs S&P BSE SME IPO index
The demonetisation measure by the government which drove the liquidity in the stock markets via mutual funds casted a rub-off impact on the IPO index as well as similar to Nifty 50. Moreso, S&P BSE IPO index outperformed the main board IPO index with returns of close to 78%.
Trend And Rate Of Growth by SME IPO
As per a Bloomberg report close to 120 SME companies tapped the equity markets in the gone by year and five of the stock gained subscription of over 100 times. And 5 of the SME companies have produced gains for investors in the range of 250-900%.
With high inherent risk in the category, retail investor category is warned against taking bet in this dedicated segment. Nonetheless, it can be a good bet for HNI class and banking and financial institutions who can better analyse the nuances of the SME segment.