It’s not easy to get bank loans on reasonable terms or raise funds from venture capitalists and angel investors so many small and medium enterprises (SMEs) are seeking to raise money through initial public offerings (IPOs) to expand.
Buoyancy in the primary market in the past months, with many issues getting subscribed multiple times the size of the offerings and bumper listings, has enthused small businesses to consider going public.
Most of them are unaware of what it will take to list on the stock exchanges. Many cannot afford the expenses of listing even on dedicated and low-cost platforms for SMEs on the Bombay Stock Exchange and the National Stock Exchange.
Yet, many enterprising entrepreneurs are finding ways to overcome barriers to taking their businesses public. The fundraising plans of these entities are modest, they are looking to raise less than Rs 10 crore.
Self Storage India CEO Manjali Khosla is among the many entrepreneurs diligently understanding the process involved in listing on small companies’ exchanges. Her company specialises in renting out small, private dedicated storage rooms.
"I have been doing quite a bit of homework and been meeting two merchant bankers. While information about SME IPO was not complex, the internal preparation work is quite a lot especially when one wants to have good reception in the market."
Khosla hopes to take her venture to the market in July. She sees enough demand in the market to grow her business two-three times. But finding enough capital has been a problem. So far, she has reached out to her family when she needed to invest more money in her business.
Khosla has understood some of the benefits of listing her venture. One of the upsides she expects from the listing is a rise in the credibility of her business, which she expects will give her an edge over competitors.
Co-founder of Jaipur-based Healing Crystals Abhishek Sharma has hired merchant bankers and is in the process of preparing the prospectus for the listing. "We aim to go public in the first quarter of the next year. We have not finalised the size of the issue but I am hopeful of raising around Rs. 5-8 crore," said Sharma.
He had approached banks and angel investors for funding, but now thinks a public listing the right solution for his company. "A listing would not help us with the capital for growth but will also help our brand image and visibility,” said Sharma
Ahmedabad-based cashew processor Fortune Exports hopes to make its market debut in March-April 2022. Its founder Vimal Mishra tried borrowing from banks, which demanded large collateral that he could not provide. He explored other options for raising capita and found no satisfactory offers.
“I work in a highly capital-intensive industry and everything depends on the raw material. To survive in this industry, I need capital to maintain 6-8 months’ worth of raw material stocks. That would give me an edge,” said Mishra.
IPO frenzy in the making?
Capital markets have been an insignificant source of funding for the MSME sector. Less than 1% of the equity capital funds of such business were raised from the market. The onset of the COVID-19 pandemic and capital crunch faced by these companies are bringing about a change.
“Following the onset of the COVID-19 pandemic, the necessity and importance of equity funding has been understood by the MSME founders,” said Ajay Thakur, head of BSE SME, the platform for listing and trading in stocks of small and medium-sized businesses run by BSE Ltd.
“We expect the number of listings on the platform to be much higher this fiscal. About 50 MSMEs have filed for approval and 25 have already been listed. On average, 30-40 companies list annually,” Thakur added.
SME IPOs had taken a hit last year with only 20 prospectuses filed in 2020-21.
Amit Kumar, founder and CEO of MSMEx, an MSME education and growth consulting services platform said that there is renewed enthusiasm among MSME entrepreneurs to understand the possibilities of listing.
Yet, most MSMEs do not have the money to finance their IPOs, he added. An IPO can cost up to Rs. 45-50 lakh. This problem is being overcome by roping in institutional investors who are given a share in equity in exchange for funds to cover the cost.
Khosla, Sharma and Mishra are members of the SME cohort with MSMEx.
Making available a dedicated platform for small and medium businesses and keeping compliance requirements light may not be enough to encourage SMEs to tap the capital market.
The SME IPO system needs to rethink and stakeholders should make the ecosystem more conducive for SME listings, Indorient Financial Services executive director & compliance officer Ivor Misquith said.
Indorient had a lead managed for an SME IPO in 2020. "There should be a separate window for SMEs to bring out their IPOs."
If there is a mainboard IPO happening concurrently with an SME IPO, a lot of retail investors will put money in the mainboard IPO, Misquith said.
That affects the subscription levels of the IPO of a small company. Therefore a separate window to avoid this conflict between the mainboard and the SME IPOs is needed, he explained.
The minimum lot size of Rs 1 lakh is another impediment to the success of an SME IPO, Misquith said. This is way higher than the minimum lot size of Rs 10,000-15,0000 for a mainboard IPO.
“Why would an investor block Rs. 1 lakh instead of putting Rs.15k in a mainboard IPO?” he asked.
Investors would prefer to invest Rs 15,000 each in different IPOs on the mainboard rather than invest Rs. 1 lakh on an SME IPO. Regulators need to do a rethink on the minimum lot size of SME IPOs to encourage bigger participation of retail investors, Misquith said.