The 2017 calendar year looks set to be a rich one in terms of initial public offering (IPO) activity.
Recent listings, such as BSE Ltd. and Housing and Urban Development Corporation Ltd. (HUDCO), have been unsurprisingly oversubscribed.
Although share market news, is heavily focused on behemoths such as public sector undertakings, recent IPOs highlight the potential of small and medium-sized enterprises (SMEs), which are in the market for financing to help expand and fulfill working capital requirements.
SMEs comprise more than two-thirds of the workforce and recent government initiatives, such as tax reforms, have encouraged the sector.
No fewer than 17 companies have raised funds on the BSE SME platform so far this year, while 22 have listed on the NSE-Emerge SME growth platform, for a total of Rs 514 crore raised. Compare this to the Rs 540 crore raised by 66 SMEs in all of 2016.
InfoBeans Technology Ltd. and Zota Health Care Ltd., both listed on the NSE-Emerge, received bids that were 31 and 15.9 times the value of their issue sizes, respectively.
So, what’s driving the hoards toward SME IPOs?
Analysts believe high net worth individuals (HNIs) are partially responsible, in addition to the usual domestic and even foreign institutional investors. But retail investors have also been getting in on the IPO game of late, anticipating a strong opening and decent post-listing gains.
This is thanks to the performance of smaller companies in the market. This year’s SME IPOs have provided healthy returns thus far - only five listings on the NSE-Emerge have performed below the IPO price, and three have seen their share price more than double since listing.
Of the newly-listed SMEs, 15 are based in Gujarat, which has piqued investor interest in the state.
Investing in IPOs can be fraught with risk, especially for rookies, since the disclosure norms for SME listings are not as strict as those of larger companies.
In addition to these companies’ stocks being volatile due to size, they usually have smaller balance sheets. More importantly, retail investors require a minimum of Rs 1 lakh to subscribe to an SME IPO - much higher than other sectors. This is to ensure participation by seasoned or knowledgeable investors.
Some SMEs do not trade on a daily basis, and the lack of a market footprint increases the risk that investors could lose money, at least in early days.
That being said, there are some good reasons to try investing in an SME IPO.
Despite the higher cost needed to subscribe, most SMEs price their offers moderately, so there is still room for investors to make a profit.
Investors are helping build a business over the long term by contributing to equity capital so the company can grow and perhaps eventually move to the main boards. This enables investors to get a foot in the door while the company is small, so the prospects for watching the value of your investment rise over time increase.
SME IPOs serve as a lesson in due diligence and understanding market fundamentals, prompting investors to spot and screen smaller firms and analyze their financials to determine whether they’re a worthy investment.
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