SME and the IPO World
By- Pardeep Bapat
Co-FounderCo-Founder
QuantAscend Consulting
Why? What? and How's?
In the ever-evolving landscape of the Indian economy, the Small and Medium Enterprises (SMEs) sector plays a pivotal role. These enterprises contribute significantly to the overall industrial output and export of the country, making them a vital component of the economic fabric. With the potential to become multi-bagger stocks, SMEs have attracted the attention of marquee investors, Financials Institutions & Family offices with proven capabilities in recognizing the scalability and growth opportunities presented by these companies.
Some of the immediate & long-term benefits that SMEs can look forward to entering the public markets:
-
Cheaper & credible Growth capital compared to Banks/private lenders.
-
Corporate Governance - Public companies are expected to have better management and regulatory laid down protocols, hence elevating the brand credibility of the listed SMEs compared to their competitors or even large MNCs.
-
Realizing the exits for the existing investors as well as the promoters over time.
-
Attracting & retaining talents by offering Tradeable Shares of the companies for wealth creation.
-
Follow on public issuance of Equity- Raise subsequent fundings to be it on SME or mainboard.
-
Improve credit ratings of the companies.
But what actually prepare them for this journey?
First, let’s understand the world of SMEs.
The Micro, Small, and Medium Enterprises (MSME) sector is classified based on their investment in plant and machinery or equipment and their annual turnover. The following table outlines the classification as per the government policy:
_edited.jpg)
IPO
An Initial Public Offering or IPO is the process through which a private corporation offers its shares to the public for the first time, in new stock issuance, and lists it on the exchanges to trade.
It is one of the ways for private investors to fully realize their investments. Sometimes it also works as an exit strategy for the earlier investors or founders by fully realizing their gains. IPO provides the opportunity for the company to obtain the cheaper source of capital through the primary market by offering its shares.
SME Initial Public Offerings (IPOs) provide a platform for these unorganized sector companies to spread their wings and expand their reach across India. The BSE SME and NSE SME (EMERGE) platforms offer a business-friendly environment for SMEs to list themselves. These platforms have witnessed a significant number of listings, with over 449 on BSE SME and 339 on NSE SME (EMERGE) since their inception.
Image: NSE EMERGE Index India.
NSE EMERGE CAGR for the past 5 years is 37% (as of July 31, 2023).
IPO Readiness
QuantAscend recognizes the following reasons as the major point of importance on the journey preparing companies for IPO-
-
Bolstering the Board for Investor Confidence
Sustainable growth and progress are the motos of every working organization. The question of what’s next is always present, in the case of companies and SMEs this question plays dodgeball in the brains of the managerial team. The leadership prepares the company for IPO while the high-pedigree board of directors instills confidence in investors and sends a positive signal regarding corporate governance. While in some cases to boost investors’ confidence companies hire experienced personnel from the market. -
Recasting Financial Reporting for Transparency
Transparency in financial reporting is a cornerstone of IPO readiness for SMEs. Ensuring proper and timely disclosures is essential for companies across all sectors, regardless of size or business model. Restated consolidated financial statements for the preceding three years are a requirement for an issuer company preparing for an IPO. Companies should start preparing these statements regularly and subject them to review and audit, presenting them to their board. Adhering to the SEBI's financial reporting requirements is crucial in avoiding delays and missed IPO timelines. -
Strategic Rejigging for Optimal Structure
Restructuring is usually done to achieve the preset goal which could be anything from maintaining the cash flow leading to layoffs or hiring professionals to improve efficiencies. The firm climbs a new high by registering for an IPO by coming into bigger light, making the restructuring one of the steps to be IPO prepared by assuring adequate resources, following legalities, etc., to avoid any delay during the filing at the stock exchange. This is ideally done well in advance, allowing sufficient time for the transition. -
Scaling Up through Mergers and Acquisitions
The outbreak of the COVID-19 pandemic has accelerated the digital economy, leading to SMEs in new-age sectors actively seeking out assets for scaling up their operations. Acquisitions are aimed at adopting a phygital approach and bridging portfolio gaps or strengthening verticals. It is crucial to strike such deals well in advance, considering the pre-IPO requirement of combining financial statements. -
Strengthening the Internal Scenario
While the board plays a critical role in establishing investor confidence, strengthening the internal scenario of an SME is equally important. Hiring beyond the boardroom, particularly in the finance function, can provide SMEs with the expertise needed to meet the regulatory, reporting, and governance standards required of publicly listed firms. CFOs, in particular, play a pivotal role in navigating the IPO journey, managing regulatory compliance, and communicating the IPO story to investors.
The IPO process-
Once an SME decides to embark on the IPO journey, it must follow a systematic process to ensure a successful listing. The following steps outline the IPO process for SMEs:
The eligibility criteria of SME are:
Benefits of SME IPO listing
-
Easy access to Capital
BSE SME provides an avenue to raise capital through equity infusion for growth-oriented SMEs.
-
Enhanced Visibility and Prestige
The SMEs benefit from greater credibility and enhanced financial status leading to demand for the company’s shares and higher valuation of the company. -
Enables Liquidity for Shareholders
Equity financing enables liquidity for shareholders, and provides growth opportunities like expansion, mergers, and acquisitions, thus being a cost-effective and tax-efficient mode. -
Equity financing through Venture Capital
Provides an incentive for Venture Capital Funds by creating an Exit Route and thus reducing their lock-in period. -
Efficient Risk Distribution
Capital Markets ensure that the capital flows to its best uses and that riskier activities with higher payoffs are funded. -
Employee Incentives
Employee Stock Options ensures stronger employee commitment, participation, and recruitment incentive.
Concluding
SME IPOs present a significant opportunity for SMEs to unlock their potential for scalability and growth. By carefully considering the factors and following the process the company can access its need for external resources to be IPO ready.
IPOs not only provide access to additional capital but also enhance the market value and credibility of the company. With the right strategy and a well-executed IPO, SMEs can flourish in the dynamic landscape of the Indian capital market. QuantAscend adds value to SMEs and startups in this journey from the start to the end by providing financial strategies for implementation.