Why 2022 is likely to be a watershed year for SME IPOs

Amid the pandemic, more SMEs are lining up to list because of a confluence of reasons – the most important of which is a growing dislike for debt, historically the mainstay of SME capital financing.
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Nearly a decade after the BSE and the NSE set up dedicated platforms for the listing of India’s Small and Medium Enterprises (SMEs), the number of SMEs actually listing via IPOs has increased rapidly in the last year or so, propelled no doubt by stock markets and the mainstream IPO boom after the first wave of the pandemic.

In fact, the number of SME IPOs from September 2020 to September 2021 stood at 40, not far behind the number of mainstream IPOs at 51. 

 

More than the actual listings, it is the unprecedented and still-growing interest among a wide range of SMEs to work towards a listing that leads us to predict that 2022 will be a watershed year for SME IPOs. 

 

So overwhelming is the interest and willingness among SME founders or promoters to list their business that it encouraged us to set up a dedicated cohort for close handholding of a select group of these businesses in their journey towards an IPO. Several members of this cohort are getting ready for an IPO over the next few months. There are various incubators and accelerator cohorts in the startup community. However, SME IPO Cohort is India’s first initiative launched for Indian MSMEs. 

The impact of listing

To be sure, listing via IPOs is no walk in the park for most SMEs, a vast majority of whom are highly traditional and conservative family-owned businesses with very little desire to share control with external shareholders. 

Listing an SME via IPO, on the other hand, demands establishment of significantly higher standards of corporate governance and financial transparency, just like their larger peers. Not many SME owners are willing to undergo capital or organisational restructuring to meet the requirements of a formal listing, or to deal with familial turmoil that is inevitable once such decisions are taken.

 

Then there is the cost of conducting an IPO, which can range anywhere from Rs 30 lakh to Rs 60 lakh, or even more depending on the issue size and companies’ capital and financial structure. And spending Rs 50 lakh for a Rs 5 crore fundraise looks like a non-viable move if any promoter is making a short term-based decision. However, in a few years, when the listing goes to the main board then this cost looks way more attractive. 

Still, more SMEs are lining up to list because of a confluence of reasons – the most important of which is a growing dislike for debt, otherwise and historically the mainstay of SME capital financing. 

The pandemic spurred them in other ways too; it brought home the importance of having abundant liquidity and cash in the business to survive in unexpected or unforeseen situations when business operations are suspended, but wages, rentals, and other expenses still must be paid. Listed companies can easily unlock the wealth of business assets and generate cash in hand from the liquidity of the market. 

 

Further, many founders or promoters also desire the increased respect their business would command once it is listed on Bombay Stock Exchange or National Stock Exchange. It would provide them with a rare and powerful competitive advantage over their peers. Many are also keen to have a diversified pool of investors in their company, vis-a-vis the hassles of finding a few business partners among their own family and friends and then dealing with them on a day-to-day basis.

 

All of these factors combined this year created an unprecedented boom in demand for SME IPO-related live learning sessions on our platform. 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 figure out the complexities involved.

The road ahead

While it is difficult to predict just how many of these businesses will eventually go the whole hog and list via an IPO in 2022, we can still assert with high confidence that it will be a record-breaking year, going by our analysis of hundreds of SMEs that are ready and willing. 

 

Industries that performed exceptionally well during the pandemic, including pharma and healthcare, IT, and education, are likely to throw up many contenders for SME IPOs. Also, there are several outperforming SMEs in nearly every industry that managed to swim against the tide and actually grew their business during the pandemic – they are also likely to announce an IPO soon.

 

The fundamental advice to all business owners is to always raise capital while they are doing well, even if it sounds counterintuitive to their ears – “why should I put money in the bank and dilute my own stake while I am doing so well?” 

The reasoning is simple: while investors will tolerate higher-than-normal valuations as long as the business is performing well and has solid fundamentals, they will quickly grow cold feet at the first signs of a business in trouble or in desperate need of cash. 

The COVID-19 pandemic has taught this lesson better than we ever could. Many SME owners or promoters are now patiently waiting for a cyclical revival in their business and to post better numbers to eventually plan an IPO in the coming years.

 

The startup ecosystem is contributing to the Indian economy and a lot is being said about the series of fundraisers, unicorns, and IPOs of non-profitable giants. This is the time when we need to raise the voice of the silently working MSMEs, which are building the nation by contributing 30 percent to India’s GDP. The 

BSE SME is breaking all-time high records daily and perhaps that is the reason why investor confidence and promoters’ awareness together will make 2022 a promising year for SME listings. 

(Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the views of YourStory.)

Edited by Teja Lele Desai