A TRICKY TERRAIN

While SME IPOS may seem enticing at the moment, they are not devoid of hidden pitfalls

In 2012, India introduced SME exchanges with the aim of providing smaller companies a platform to access growth capital when needed by tapping into the market. But a key challenge arose - protecting investors due to the unique characteristics of smaller businesses, such as family-run structures, lower transparency, and irregular accounting practices.

To address this challenge, SEBI introduced stringent guidelines, notably raising the minimum investment per application to ₹1,00,000. This was a sizeable increase from the typical ₹13,000 – ₹15,000 seen in the case of main board IPOs.

Since its establishment, SME exchanges have drawn substantial interest from both companies and investors. The year 2023 has been a blockbuster year; during this period, the BSE SME IPO index has delivered an impressive year-to-date return of approximately 57%, significantly surpassing the 7.7% return of India’s benchmark stock market index, BSE Sensex.

Even from a long-term perspective, BSE SME Index has provided nearly 2166% returns compared to BSE Sensex, which has delivered 92% in the last five years. This remarkable performance highlights the evolving success of Indian SME exchanges in meeting smaller companies’ capital needs, ensuring investor protection, and yielding substantial returns.

It is no wonder that, to date, approximately 454 companies have listed on the SME platform (BSE and NSE), with 179 of them subsequently shifting to the main board. This meteoric rise can be attributed to several important factors, including a lowered minimum application threshold for SME IPOs, a streamlined and cost-effective listing process, and relaxed reporting requirements.