Bihari Satasai, a famous Hindi poet in 17th century said “देखन में छोटे लगै, घाव करें गंभीर।“ means that certain things look small but creates impact at a very large level. In simpler terms, imagine a small pebble causing ripples in a big pond - that's how impactful SME IPOs are for India's goal of becoming the world's third-largest economy by 2027. These IPOs, where small businesses offer a part of their ownership to the public, play a huge role in boosting India's economy. Small businesses, known as MSMEs, already contribute around 29% to India's economy, and experts believe they could contribute up to 50% as India grows. To make this happen, these small businesses need more support, especially in terms of money and resources. Here's where SME IPOs step in, acting like a catalyst for their growth and ensuring better business practices.

This economic boom is possible even faster if we build a robust foundation that covers agriculture, infrastructure, transportation, manufacturing, technology, and services. As the nation mobilizes corporate and governmental resources to lead this charge, the bedrock remains the MSMEs, necessitating a substantial augmentation of their capacity and capabilities at every level. This metamorphosis demands significant investments, revealing a critical gap—while debt funding addresses short-term and high cashflow needs, long-gestation expansion requirements and collateral-based funding pose challenges for small and medium businesses.

Equity funding, a vital enabler for corporates through avenues like Foreign Direct Investment (FDI), Private Equity (PE), and capital markets, encounters formidable barriers for SMEs. The SME IPO emerges as a potent instrument, facilitating equity funding to bridge the capacity and capability growth gap and instil robust governance in business practices.

Over the past decade, 892 SMEs have chosen the BSE SME & NSE Emerge platforms, collectively raising over Rs 14,000 crore. In calendar year 2023 alone, 172 SMEs were listed on the SME IPO platform, raising Rs 4,600 crore—an average equity fund infusion of Rs 27 crore per SME. Though seemingly modest against the backdrop of trillion-dollar economies, the cumulative impact of SME IPOs is leading to a domino effect, triggering substantial economic movements. The majority of these SMEs, operating in B2B domains, directly and indirectly, support large corporations and government expenditures, underscoring the significant and far-reaching impact of SME IPOs on economic growth.

While traditional year-on-year growth of 10-20% relies on debt funding, SMEs can attain multi-fold growth through equity funding channels like SME IPOs. Overall, 167 companies listed in the calendar year 2021 and 2022 posted combined Profit After Tax (PAT) of Rs 437 crore at the time of listing. After raising Rs 2753 crore through SME IPO these companies experienced a 2.3 times surge and posted Rs 1028 crore combined PAT in subsequent years.

Presently, 35% of SMEs have transitioned to the main board, delivering exceptional performance, so SME IPO is not only the gateway to the main board listed corporate club but also fetches credibility and visibility to these small businesses. Overall, an SME IPO attracts all the ingredients for the perfect growth recipe for any business:

Funding

• Interest-free equity funding
• Additional debt funding due to leverage
• Better interest rates to reward better governance
• Subsequent fundraise within a few weeks

Team

• Listed company attracts talent
• ESOPs work for retention and reward
• Governance comes with a better work culture

Customers

• Trust and stability attract strategic clients
• Visibility leads to demand inflow
• Easier cross-border expansion

Suppliers

• Better payment and delivery terms
• Strategic arrangements & volume discounts

This is an equally attractive opportunity for the investors. In the calendar year 2023, out of 172 SMEs that got listed, around 50 IPOs got more than 100 times oversubscription interest from investors and got more than a 50% gain in the share price on the listing day.

To summarise, the SME IPO is a big step for India to become the third-largest economy by 2027. In 2023, 172 small businesses collected a whopping Rs 4,600 crore through SME IPOs, showing how powerful it can be. Right now, out of 3 lakh small businesses, only 892 are listed, which is a tiny 0.3%. Even if we imagine 2% getting listed (around 6000), it would be more than the main board. This could lead to strong and stable growth, putting India in the top three economies. It's a game-changer for our country's future.
 

References:

https://economictimes.indiatimes.com

https://msme.gov.in/msme-annual-report-2022-23

https://www.chittorgarh.com/report/sme-ipo-list-in-india-bse-sme-nse-emerge/84/