Why Are More SMEs Opting For IPOs?
The Indian market is an amalgam of all different kinds of companies, ranging from small family run businesses to medium sized companies to multinational corporates. Over the past few years, we have seen a sharp increase in the growth of SMEs. By employing nearly 11 crore people, SMEs produce around 45% of India’s total manufacturing output. SMEs thereby contribute to about 17% of India’s GDP and nearly 40% of India’s total export.
One of the biggest challenges faced by such enterprises is access to capital. To help mitigate this, SMEs can newly sell its shares to the public and get listed at BSE SME or NSE Emerge platforms by means of an SME IPO. SMEs are generally traditional, conservative family-run businesses who have little to no desire to share control over their businesses with external shareholders. Hence outside investors are not inducted in the business. However, with listing the promoters can retain significant control over the company without much interference in day to day operations. Listing an SME through an IPO can cost the company anywhere from Rs. 30 lakhs to Rs. 60 lakhs, or maybe even more depending on the issue size, the companies’ capital structure and financial structure.
An IPO requires an establishment of significantly higher standards of corporate governance and financial transparency. Although listing through an IPO would not be a simple task for an SME, it is certain to help businesses scale up quicker. To help ease this process, the Tamil Nadu Government has announced assistance to SMEs for listing & raising money in the SME stock exchange with maximum of Rs.30.00 lakhs subject to 50% of the total expenditure incurred on SME IPO.
The pandemic has helped emphasize the importance of having abundant liquidity and cash in the business to help survive in case of any unforeseen or unexpected situations. In such a situation, a listed company will easily be able to unlock the wealth of their assets and generate cash from the liquidity of the market.
Listing shares of a company in the market is expected to generate a sense of respect for the company. For this reason, many founders and promoters prefer to list their companies’ shares. This could help the company gain competitive advantages over their peers.
The above are some of the major factors that caused an unprecedented boom in the number of SMEs wanting to go for an IPO. While business owners were still making up their minds on whether they should list their business or not, they still rushed to learn about the IPO process and estimate whether an IPO was viable or not.
As a part of a knowledge sharing series, Consulting & Beyond in association with Madras Management Association is conducting a panel discussion on Capital and Growth of SME on 12th April, 2022 at 6 PM.