Business Value and Wealth Creation- Accelerating the SME Business Growth through IPOs

Tapping the upbeat investor sentiments, the small and medium enterprise IPO market is gaining traction amongst investors. With the increasing number of firms coming in BSE and NSE, it is sending positive signals and thus lending a lot of confidence in the SME capital markets. As per the reports, the year 2015 showed that there is a healthy appetite for quality companies though the secondary market was unsettled. Turning out as a market development initiative the result is clear with the fundraising by small and medium enterprises (SMEs) from initial public offerings getting doubled. As per Economic Times, the funds doubled to INR 384 crore in the April-September period of 2016-17 from the year-ago period. In comparison, 27 SMEs raised INR182 crore in the first half of the preceding financial year, 2015-16. 

 

This opportunity is positive for both the SME entrepreneurs as well as investors. On one hand it has opened doors and given opportunity for the SME entrepreneurs to raise equity capital for expansion. At the same time, it is a golden time for investors where they can identify good SMEs and invest in them at an early stage. SMEs have always played an important role in the Indian economy and an adequate flow of financial resources to them is the need of the hour.

How are SME platforms helping the smaller firms: Though there are a lot of traditional ways from which SMEs can get funding, but a dedicated platform lays the road ahead. Not only it provides a better solution to their financial requirements to execute their expansion plans, but also offers a better valuation for the company. With other benefits like an ease of access to capital & financing opportunities, enhanced visibility and credibility, eased tax planning, increase in overall SME growth, etc., it also brings a medium to a long term wealth opportunities to the investors and promoters.  

Outlook of market participants: While banks and mutual funds have started looking positively at the SME sector, the investors’ outlook is not yet clear. Investment in SME stocks seems risky for a lot of investors. Some major reasons being, lack of enough liquidity and low turnover. The outlook can be changed with increased transparency and institutional participation in companies listed on SME platforms. Increased and proper hand-holding to the managements of these companies can make things much easier and better. Professionals like Chartered Accountants can play a very important role in educating the promoters of the SMEs. They can educate SMEs with their market knowledge and experience and thus make a win-win for all.

Global scenario: All the developing and developed countries have set separate exchange for the SME segment. The London Stock Exchange’s Alternative Investment Market (AIM), National Stock Exchange (NSX), Shenzhen Stock Exchange, NILEX, GEM (Growth Enterprise Market), MOTHERS, TSX Ventures Exchange (TSX-V), KOSDAQ, MESDAQ, etc. are all catering to the funding requirements of SMEs. This has helped them in creating a SME friendly environment and thus help them in overcoming the biggest challenge faced by these enterprises i.e. access to capital.

Factors to be kept in mind: For a potential investor, both investors in stock exchanges as well as analysts lay emphasis on the ‘price-to-earnings (PE) multiple’. Institutional holdings, Revenue streams, financial performance over the past few years, business model, valuation, etc. Investing in stocks is a long term investment which can be very risky at the same time. Thus, be very cautious and keep in mind all the factors before betting on what will be the next big thing.

Mr. A M Naik, Chairman, L&T in an interview shared that “L&T Infotech IPO will excite employees, but put them under pressure.” He adds, “Many companies have to do an IPO for money, but we are doing an IPO to excite employees and to put them under pressure, let’s say, external world’s pressure in terms of benchmarking comparing. Every father wants their son and daughter to do better than them. So L&T Infotech is my baby, it has now become little more than a teenager, and is now going to college.”

This brings us to another side of the investments in IPO. Being an exciting time for every business by giving it an entry into the world of the stock market and benefits to investors and the SME entrepreneurs, it also opens opportunities to the company employees who get a lot of the added advantages of the IPO.

In conclusion, SMEs play a vital role in the development of the country, but at the same time they have faced challenges. A lot of efforts have been made in the past as well and there will be endless discussions on the same in the future. The removal of the weak links by sustainable exchanges, regulations, financial transparency and better hand-holding can be a boon for many.