Opportunity to grow with SMEs

This year a slew of SME companies are bringing their IPOs. These SME IPOs have given good returns to the investors and their IPO indices are close to record levels. That’s why investors are getting attracted to the BSE SME IPO index. After looking at all this you might be thinking whether to invest in SME through IPO or secondary market.

In order to understand this, you have to understand what is SME IPO and how to invest in them?

You invest in the share market through Bombay Stock Exchange (BSE) or National Stock Exchange (NSE). However SMEs are not listed on these exchanges, so how can you invest in them? So the answer is SME platform. Right now there are 2 platforms for SMEs to get listed on the stock market, they are BSE SME and NSE Emerge.

It is a good way for small companies to raise money and expand. Apart from this, it is also an opportunity for investors to invest in the emerging and growing companies.

Now let us compare the performance of SME companies with that of Sensex and Nifty.

Sensex and Nifty touched their all-time high on June 28, while the BSE SME index is trading at 7.75% below its all-time high. However, as compared to Sensex-Nifty, the performance of the BSE SME IPO has been very impressive specifically in the long term. In the last 5 years, Sensex has given a 78% return while the SME IPO index has given around 1360% return.So far this year, a total of 74 IPOs have been listed on the SME platforms of both BSE and NSE, whereas in the year 2022, there were a total of 109 IPOs. This means that in the first six months of 2023, SME platforms have already seen two-thirds of the total IPOs compared to the entire year of 2022. Up until now in 2023, the mainboards of BSE and NSE have only seen 10 IPOs.

In comparison to the mainboards of BSE and NSE, the SME platform has witnessed more action and greater activity in 2023. There is more buzz and activity surrounding IPOs on the SME platform this year.

The figures reveal that out of the 28 IPOs listed on BSE’s SME platform in 2023, 3 issues have given returns of more than 2 times the investment. Approximately 9 IPOs have delivered returns of over 40%, while 7 companies have disappointed investors.

Through the SME exchange, investors have the option to choose companies that have just begun their journey in the corporate world. Investors can hope that as these companies progress, they will also share in their success.

In the indian business, there have been several cases corporate misgovernance such as Satyam Computers, IL&FS, YES Bank, CG Power, Videocon Industries etc. In recent times names like PTC India Financial Services, Byju’s, Zee Ent, Eros International and Shree Cement have also come up. However, such cases are not limited to just mainboard companies. Cases of corporate governance are also there in SME companies. In recent times, we have one case. This case is related to the company Milestone Furniture which is in the business of home and office furniture and it belongs to the SME segment. It has not released its march quarter results yet.

On June 7th, Milestone Furniture informed BSE that they are deferring the release of their financial results because their chartered accountant, CA Bhupendra Gandhi, is missing and not responding to calls. On May 25th, a board meeting was held to consider the company’s results, which lasted only for 11 minutes. In this meeting, there were 7 main agendas, including the Extraordinary General Meeting (EGM) scheduled for June 16th and changing the company’s registered office from Palghar to Mumbai, along with the matter related to the missing CA.

This situation is indeed surprising and concerning. The absence of a CA has caused the company to struggle in complying with the regulations of BSE and the Ministry of Corporate Affairs.

Now the question arises whether the launch of the SME exchange by BSE and NSE has achieved its intended purpose or not. The fact is that in the last one to two years, this exchange has performed remarkably well in terms of returns. However, there has been a lack of liquidity in SME shares, meaning the volume of buying and selling in these shares has been low. The lot size for IPOs on some SME exchanges is often set in such a way that it requires an investment of around one lakh rupees.

This market experiences significant fluctuations, and the trading volume is quite low. This means that any adverse situation has a significant impact on the returns. In this market, the role of mutual funds, banks, and other financial institutions is limited. Moreover, historical data for such shares’ returns are not readily available. Therefore, if any retail investor wants to invest in these shares, they will need to conduct thorough research and approach it with caution.

So, overall we can say that in last 2-5 years, SME companies have given good returns. However, this is due to few selected companies and just like big firms, issues of corporate governance are also prevalent in SME companies. For a retail investor, understanding these companies is more difficult than understanding mainboard companies. The problem is that in SME companies’ IPOs, there is often a lack of liquidity, meaning it becomes difficult to sell shares easily. Therefore, it is not advisable to invest in any SME company’s IPO solely based on the index’s returns. It is essential to consult your investment advisor and carefully consider their advice before investing your hard-earned money in the stock market.