The MSME sector is the largest and significant contribution towards the progress of India in the social and economic context. These are very crucial for the country’s total gross domestic product and exports; they control a significant amount of the power.
To categorize the MSMEs the Ministry of MSMEs divides these companies according to their investment in the plant, machinery or equipment, or their annual turnover as of March 2024. This also enables a swift identification of such enterprises for growth and necessary support.
| Type | Investment | Turnover |
| Micro Enterprises | Does not exceed ₹1 crore | Up to ₹5 crores |
| Small Enterprises | Does not exceed ₹10 crores | Up to ₹50 crores |
| Medium Enterprises | Does not exceed ₹10 crores | Up to ₹50 crores |
The Rise of SME IPOs
In recent years, there has been a significant rise in SME IPOs. This rapid expansion is not simply a temporary trend, but a significant shift in the financial sector, driven by various factors that have made the SME IPO market increasingly attractive and dynamic
The SME IPO market in India has experienced substantial expansion, marked by an increase in both the number of listings and capital raised. The rise indicates a growing confidence from small and medium businesses in using capital markets for funding.
As per, data gathered in Chittorgarh indicates a notable increase in SME IPOs between January 2021 and July 2024. Here is a snapshot of the Semi-annual SME IPO activity annually.
According to various Draft Red Herring Prospectuses (DRHPs), companies primarily aim to raise funds to meet debt obligations, support expansion initiatives, and fulfill working capital needs. A significant portion of the raised funds comes from offer-for-sale (OFS) transactions, where private equity (PE) and venture capital (VC) investors exit via both IPOs and secondary market routes.
The surge in SME IPOs has attracted the attention of SEBI and stock exchanges. Recently, the National Stock Exchange (NSE) imposed a price control cap of 90% over the issue price for SME IPOs, limiting listing-day gains to prevent excessive market volatility. This move aims to address concerns about inflated valuations. About 138 companies have been listed in the SME segment so far in 2024 on both the stock exchanges and about 35 companies saw listing day gains in the range of 99% – 415%.
The growing number of SME IPOs shows investors’ increasing trust and a robust economic environment. However, the rise in profits from listing multibagger stocks has raised concerns about a potential market bubble. Investors must exercise caution and conduct thorough research before participating in SME IPOs.
Key Drivers of the Boom
There are multiple reasons that have led to the increase in SME IPOs:
1. Favorable Regulatory Environment: SEBI has implemented various changes to enhance accessibility and transparency for SMEs in the IPO process. This encompasses streamlined listing criteria and decreased regulatory obligations.
2. Economic Growth: India’s strong economic growth has led to a positive environment for investment. Strong economic fundamentals and investor confidence have boosted the main market activity.
3. Domestic Investor Participation: Unlike before when foreign institutional investors were in control, now domestic retail and institutional investors are mainly driving the growth. This modification has provided a dependable and long-lasting funding source for small and medium-sized businesses.
4. Sectoral Diversity: Various sectors, including technology, consumer products, and industrial goods, have participated in the SME IPO market. This array of investors has been attracted to the variety, leading to an increase in the market’s growth.
Notable Listings and Performances
| Companies | Listing Market Capitalisation | Current Market Capitalisation | Total Gain(%) |
| Insolation Energy Ltd. | 158 | 3142 | 4210% |
| KP Energy Ltd. | 24 | 2411 | 9970% |
| Australian Premium Solar (India) Ltd. | 276 | 434 | 863% |
| Aplex Solar Limited | 805 | 813 | 629% |
Trends and Future Outlook
1. Increased Oversubscription: Numerous SME IPOs have experienced substantial oversubscription, demonstrating strong investor interest. More small and medium enterprises are expected to continue seeking growth funding from the capital markets in the future. More than half of Indian small and medium enterprise IPOs experienced subscription rate increases of over 100%, with HOAC Foods India’s IPO standing out with a subscription rate of 1,834 times, and the retail portion with a remarkable 2350 times.
2. Performance of SME Indices: The SME IPO index showed better performance than the major indices, with a 26% increase in FY24, while the Nifty 50 only saw a 9% gain. This show highlights how SME stocks have the capacity to provide excellent returns.
`13. Sustainability of the Boom: Experts have differing views on whether the current boom is likely to last, despite its promise. Factors such as economic market conditions, regulatory changes, and market dynamics will be key factors in shaping the future of the SME IPO market.
Final Thoughts
The surge in SME IPOs in India demonstrates the strength and promise of the nation’s small and medium businesses. Due to positive regulatory backing, robust economic foundations, and growing investor involvement, the SME IPO market is set to see ongoing expansion. Nevertheless, stakeholders need to stay alert and flexible to maintain this progress and overcome the obstacles that lie ahead.
This surge offers small and medium-sized enterprises access to necessary funds and gives investors chances to get involved in the success tales of upcoming businesses. Watching how these trends influence the future of India’s financial sector will be intriguing as the market progresses.
