If you have been following the IPO space in India, you must have probably noticed a rising trend – a growing number of small and medium enterprises (SMEs) going public with IPOs. These SME IPOs aren’t just making headlines, they are also providing an opportunity to small businesses to grow, gain visibility, and raise capital.
But just like every investment opportunity, SME IPOs have their fair share of excitement and caution. In this blog, we understand SME IPOs in India, the reasons they are booming, the opportunities they offer, and the risks they carry.
What Exactly is an SME IPO?
So, let’s start with the basics. An SME IPO is when a small and medium-sized enterprise offers its shares to the public for the first time. Unlike large-scale industries that list on the mainboard of NSE and BSE, the SME IPOs are listed on a separate platform – NSE Emerge and BSE SME.
These platforms have simplified the listing process with slightly relaxed regulations to make it easier for these companies to raise capital through the stock market.
Why Are SME IPOs Suddenly Getting So Much Attention?
Several factors are driving interest in SME IPOs.
1. Expectation of High Returns on listing
Many SME IPOs have delivered stellar listing day gains. The big gains have caught the attention of retail investors, especially in a market where large-cap stocks have become more expensive.
Example
Dhanlaxmi Crop Science – IPO price 55.00, Listing Price – 104.5, Gain – 90%
Emerald Tyre Manufacturers – IPO price 95.00, Listing price – 180.5, Gain – 90%
Purple United Sales – IPO price 126.00, Listing Price – 199.00, Gain – 57.94%
2. Surge in Retail Participation
There has been a surge in retail participation in the financial markets due to increased awareness and easy access. With retail investors exploring more investment avenues beyond the traditional stocks and Mutual Funds, SME IPOs have become attractive due to their low ticket size and high perceived upside.
3. Lower Entry Barriers for Companies
The listing norms on NSE Emerge and BSE SME platforms are comparatively less stringent than those for mainboard IPOs. This reduces the regulatory cost and makes compliance easy for small businesses, helping them tap the capital markets.
4. Favorable Market Sentiment
Despite the occasional hiccups, India’s broader economy is growing, and the bullish sentiment across sectors trickles down to SME stocks. As investors seek new opportunities, SMEs are seen as a way to tap into India’s growth story directly.
Now, let’s look at some numbers to understand the popularity of SME IPOs.
In 2023, around 180 SME IPOs were launched in India, raising around ₹5,000, and in the year 2024, the number increased to 243 SME IPOs, raising more than ₹9,000 crore.
These numbers are a testament to the growing popularity of SME IPOs in India.
Benefits to the company taking the SME IPO route
1. Capital Without the Debt Burden
For many SMEs, it is a struggle to secure bank loans, especially without solid collateral. An IPO offers them a way to raise capital without taking on debt. This money raised from the IPO can be used to expand operations, invest in R&D, or enter new markets.
2. Increased Credibility
Getting listed gives a company a major credibility boost. Customers, vendors, and even potential employees start taking them more seriously. Being a publicly traded company also sends a strong message that the business of the company is transparent and here for the long haul.
3. Liquidity for Founders and Early Investors
IPOs provide founders and early investors a chance to cash out some equity.
4. Attracting Talent
The company can use Stock options and ESOPs as incentives for hiring and retaining talent, when shares are traded on a stock exchange. Startups can compete better for skilled professionals through these incentives.
The Flip Side: Risks You Need to Know
Although SME IPOs offer attractive upside potential, they’re not without risks, especially for retail investors. Here’s what you should be aware of:
1. Low Market Liquidity
One of the major challenges with SME IPOs is the low trading volume. This can make it difficult to buy or sell shares, especially during market volatility.
2. Higher Volatility
Another issue with SME stocks is that they are more volatile as compared to their large-cap counterparts. Even minor market fluctuations or adverse business conditions, or news might bring about substantial price changes.
3. Absence of Historic Data
Unlike large companies, which have decades of performance and financial data, SMEs may have limited operational history. It therefore becomes harder to assess the long-term viability or financial health of these SMEs.
4. Regulatory and Operational Risks
As compared to big companies, SMEs face greater risks in terms of compliance, competition, and operational issues. It is therefore important that an investor has a closer look at the business model and management of the SME before investing in its IPO.
5. Some IPOs Are Overhyped
Let’s be honest — not all SME IPOs are driven by fundamentals. Some SME IPOs get hyped up with little business substance backing them.
In fact, S. Naren, Chief Investment Officer at ICICI Prudential, recently warned that the SME IPO space has become “the most dangerous part of the market” due to these risks.
What’s SEBI Doing About It?
Thankfully, regulators aren’t sitting back. SEBI (India’s capital markets watchdog) has recently tightened norms for SME IPOs:
• Stricter Eligibility: SMEs must now show a net profit of at least ₹1 crore in two of the last three years.
• Cap on Offer for Sale: Existing shareholders can’t offload more than 20% of the issue size. This ensures fresh capital is going into the business, not just into someone’s pocket.
• Improved Due Diligence: Merchant bankers are being held more accountable, with more emphasis on proper disclosures.
Some SME IPOs That Caught Everyone’s Attention
Let’s take a look at a few recent SME IPOs that made headlines — for the right reasons.
TAC Infosec Ltd
• Issue Price: ₹106
• Listing Gain: 107.55%
• Current Price (April 2024): ₹1,480+
• Sector: Cybersecurity
A solid business model in a fast-growing sector helped it deliver nearly 1,200% gains.
Owais Metal and Mineral Processing Ltd
• Sector: Metal Processing
• Delivered over 900% returns in less than a year
• Strong fundamentals and industry demand helped this stock fly
These aren’t isolated cases. Several SME IPOs have generated staggering returns in under 12 months — making the space very attractive for risk-tolerant investors.
Who Should Consider Investing in SME IPOs?
Investing in SME IPOs isn’t for everyone. However, they could be great for
• Investors with a higher risk appetite
• Those looking to diversify their portfolio beyond traditional large-cap and mid-cap stocks
But if you’re someone who prefers stable, predictable returns or isn’t keen on researching niche businesses, you might be better off sticking to mainboard IPOs or mutual funds.
Final Thoughts: Tread Boldly, But Carefully – SME IPOs in India
SME IPOs are thrilling. They symbolize India’s entrepreneurial spirit and present an opportunity to invest in tomorrow’s leaders, before they break into the mainstream.
But don’t get tempted by the big listing returns — the SME space is one where you need caution, patience, and research. All SME IPOs won’t be multibaggers, and not all businesses are created to endure market cycles.
Invest time in researching and doing some homework:
- Read the DRHP (Draft Red Herring Prospectus)
- Understand the SME’s business model and risks
- Check if promoters have a solid track record
- Evaluate if the IPO pricing is fair or just inflated hype
If you’re willing to do the work, SME IPOs can be a rewarding addition to your portfolio — both in returns and in the satisfaction of supporting India’s next-generation businesses.
For more information on Current and Upcoming IPOs, please check the following link
