Fundraising via SME IPOs at record high

However, SME segment is grappling with lack of liquidity and lacklustre institutional participation

The year 2017 is poised to be the best year for public share sales of small and medium enterprises (SMEs) as individual investors, lured by past returns, flock to pick up offers.

The SME platform has seen 63 offers mop up Rs 716 crore till July this year, higher than the amount raised in any other calendar year, and taking the number of issuances to 262. Of these, 190 firms have listed on the BSE.

Individual investors betting on such stocks have not been disappointed. Since 2012, a little more than 25 per cent of the offers have turned out to be multi-baggers. Majestic Research Services & Solutions, Suyog Telematics, Umiya Tubes, and Vidli Restaurants have clocked gains in excess of 1000 per cent each since listing. Overall, 65 per cent of the issues are trading in the green.

What’s more, nearly three-fourths of the companies listed this year are trading in the green, with seven offers trading at more than 100 per cent of the issue price.

Interest from individual investors, including retail investors, can be gauged by the spike in overall subscription levels. Between 2012 and 2016, only two offers got an overall subscription of more than 10 times. This year, however, 17 offers were subscribed more than 10 times. Accord Synergy has got the best response this year with the issue getting subscribed 138 times and the portion for wealth and retail investors getting bids for 110 and 204 times the shares on offer, respectively. 

"Sustained efforts at creating awareness in SME clusters has been showing results and we are seeing a strong pipeline of SMEs coming forward for listing. SMEs can use the platform to raise productive capital for their growth and get higher visibility before stakeholders, which benefits them immensely,” said Ravi Varanasi, chief business development officer, National Stock Exchange. 

State governments are doing their bit to encourage SMEs to list. In 2016, the Gujarat and Rajasthan governments announced subsidies to pay for the expenses of SMEs going for IPOs. The Gujarat government, for instance, began reimbursing 10 per cent of the IPO expenses of SMEs in the state, subject to a maximum of Rs 5 lakh each. 

However, the SME segment is grappling with issues such as lack of liquidity and lacklustre institutional participation. According to experts, the need is to bring in priority investing from big institutional players and tweak the lot size to improve liquidity. The minimum lot size varies between Rs 1 lakh and Rs 1.5 lakh.

“We believe lot size restriction should be relaxed, at least in the secondary market. That will provide easier entry and exit to investors,” said Mahavir Lunawat, MD, Pantomath Capital Advisors. 

Despite the possibility of high returns, experts also highlight the probability of one’s entire capital being wiped out in these companies. Analysing these firms can also be a challenge as they are not tracked by analysts and there is not much information in the public domain. This means investors are left to themselves when it comes to assessing the fundamentals and gauging the credibility of the promoters.

Besides improved transparency, an IPO route for SMEs reduces their dependence on debt financing and helps them maintain their debt-equity ratio efficiently, say experts. Listed SMEs with good ratings are able to get loans at lower interest rates than the market.