The S&P BSE SME IPO Index has outperformed the mainboard’s BSE IPO Index. In the last one year, the SME Index has given returns of 441 per cent, effectively multiplying investor wealth by five times within a single year.
In contrast, the exchange’s mainboard IPO index has given a 97 per cent return to its investors, doubling investor wealth over the same period.
Further, in the last nine years, the SME IPO index has returned a whopping 70 times return, while the mainboard IPO index has multiplied by seven times during the same period.
The Bombay Stock Exchange (BSE) had launched the SME Platform to ease the process of raising equity funds for Small and Medium Enterprises (SMEs). The SME IPO index, created in partnership with Standard & Poor, tracks the performance of the SME companies until one year of their IPOs.
After giving a 20x return from 2012 to 2018, the index had fallen to 1400 points until April 2021, implying the lack of investor interest during the period. Investors were also apprehensive as SMEs were adversely affected by the pandemic. However, as liquidity increased in the system, these stocks shot upwards.
The SME market also suffers from the problem of liquidity as there are several restrictions in terms of minimum lot size, making it difficult for smaller investors to trade. BSE has seen around 450 listings in the SME space, of which around 115 migrated to the mainboard.
The markets for small-cap, micro-cap, and SME companies might be inefficient as some pockets are under-researched and illiquid. Large institutions rarely invest in companies with low revenues, low profits, and high risk. Several companies also prefer to raise money through the private market. The private market does not have rules, regulations, or limitations that could hinder a company’s capital raising or its growth, unlike a public listing.
However, investors should be careful as small companies have a small revenue base which can be decimated during cyclical downturns. Such companies might not possess the financial firepower to survive a slowdown, possibly resulting in bankruptcy.
Further, unlike their larger competitors, these companies lack economies of scale, the ability to build distribution networks and are usually heavily dependent on a few customers, putting them in a vulnerable position. Several SME companies have also conducted IPOs, and then fraudulently siphoned the money away.
Just a few years back, a SME IPO scam was uncovered by the Securities and Exchange Board of India (SEBI). The modus operandi involved floating bogus companies that would be listed on the exchanges, fresh shares would be allotted among the group, players would fund their own IPO and the money raised through the IPO would be used to fund traders responsible for continuously hiking the prices. The entire operation was a means to convert black money into white money.
While the SME space has offered good returns in the past, investors should conduct proper due diligence before investing.
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