SME IPO: A domino effect for India to become the third-largest economy
As evidenced by the remarkable success of 172 SMEs raising Rs 4,600 crore in 2023 alone, the SME IPO triggers a domino effect, steering substantial economic movements.
In a recent forum, RBI Deputy Governor Michael D Patra talked about India's trajectory towards becoming the third-largest economy and is projected to surpass $5 trillion in Gross Domestic Product (GDP) by 2027. Fuelled by its vibrant and sizable demographic, particularly the burgeoning micro, small, and medium enterprises (MSMEs) sector—currently the world's second-largest after China with a sizeable 63.4 million enterprises—India's economic landscape is transforming.
The MSME segment significantly bolstered India's GDP, contributing 29.15% in FY 2021-22. Government targets and global economic trends suggest a prospective surge, potentially elevating MSMEs to contribute up to 50% to India's evolving developed economy, as envisaged by Chief Economic Advisor Anantha Nageswaran, who projects a $7 trillion economy by 2030.
For this economic boom to materialise, we must have a robust foundation encompassing agriculture, infrastructure, transportation, manufacturing, technology, and services. As the nation mobilises corporate and governmental resources to lead this charge, the bedrock remains the MSMEs, necessitating a substantial augmentation of their capacity and capabilities at every level. This metamorphosis demands significant investments, revealing a critical gap—while debt funding addresses short-term and high cashflow needs, long-gestation expansion requirements and collateral-based funding pose challenges for small- and medium-sized businesses.
Equity funding, a vital enabler for corporates through avenues like Foreign Direct Investment (FDI), private equity (PE), and capital markets, encounters formidable barriers for SMEs. The SME IPO emerges as a potent instrument, facilitating equity funding to bridge the capacity and capability growth gap and instil robust governance in business practices.
Over the past decade, 892 SMEs have chosen the BSE SME and NSE Emerge platforms, collectively raising over Rs 14,000 crore. In calendar year 2023 alone, 172 SMEs were listed on the SME IPO platform, raising Rs 4,600 crore—an average equity fund infusion of Rs 27 crore per SME.
Though seemingly modest against the backdrop of trillion-dollar economies, the cumulative impact of SME IPOs leads to a domino effect, triggering substantial economic movements. The majority of these SMEs, operating in B2B domains, directly and indirectly, support large corporations and government expenditures, underscoring the significant and far-reaching impact of SME IPOs on economic growth.
While traditional year-on-year growth of 10-20% relies on debt funding, SMEs can attain multi-fold growth through equity funding channels like SME IPOs. Overall, 167 companies listed in the calendar year 2021 and 2022 posted combined Profit After Tax (PAT) of Rs 437 crore at the time of listing. After raising Rs 2,753 crore through SME IPO, these companies experienced a 2.3X surge and posted Rs 1,028 crore combined PAT in subsequent years.
Presently, 35% of SMEs have transitioned to the main board, delivering exceptional performance, so SME IPO is not only the gateway to the main board listed corporate club but also fetches credibility and visibility to these small businesses. Overall, an SME IPO attracts all the ingredients for the perfect growth recipe for any business:
Funding
- Interest-free equity funding
- Additional debt funding due to leverage
- Better interest rates to reward better governance
- Subsequent fundraise within a few weeks
Team
- Listed company attracts talent
- ESOPs work for retention and reward
- Governance comes with a better work culture
Customers
- Trust and stability attract strategic clients
- Visibility leads to demand inflow
- Easier cross-border expansion
Suppliers
- Better payment and delivery terms
- Strategic arrangements and volume discounts
This is an equally attractive opportunity for investors. In the calendar year 2023, out of 172 SMEs that got listed, around 50 IPOs got oversubscribed by more than 100X and got more than a 50% gain in the share price on the listing day.
In conclusion, the SME IPO emerges as a milestone in India's trajectory towards becoming the world's third-largest economy by 2027. As evidenced by the remarkable success of 172 SMEs raising Rs 4,600 crore in 2023 alone, the SME IPO triggers a domino effect, steering substantial economic movements.
At present, out of a total of three lakh SMEs, only 892 are listed which is only 0.3% and even if we consider 2% listed SMEs (around 6,000) it will lead to an SME listing platform larger than the main board list. This will lead to a robust and foundational growth of India’s economy in the top three positions.
The article is written by Amit Kumar, Founder and CEO of MSMEx.
Edited by Kanishk Singh
(Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the views of YourStory.)
