Over 173 companies debuted on Dalal Street in the first half of the year 2024. Guess what? Out of these, 117 companies belong to the SME segment. Yes, the Small and Medium Enterprises accounted for 77% of the IPO of 2024.
The SME IPOs story was more or less last year too. Around 182 SMEs have raised funds through IPO in 2023.
Don’t you wonder why Indian SME IPOs are rising so fast? Their successful businesses, sustainability, winning investor confidence, and the list goes on…
Out of all the reasons the prima Madonna here is the new NSE rules.
So hold on because we are going to discuss everything related to SME IPOs boom and the new NSE rules.
Here we go!
(A) Reasons behind the success of Indian SME IPOs
The SME IPOs of India are making waves due to the following reasons-
(A.1) Rising Significance of SMEs in the Indian Economy
First, let’s talk about the importance of SMEs in India. Small and Medium Enterprises might sound small, but they pack a big punch. SMEs contribute around 30% to India’s GDP and are responsible for nearly 48% of the country’s total exports. That’s a massive contribution when you think about it. SMEs aren’t just small players—they’re the backbone of the economy, employing over 110 million people. That’s more than the population of some countries!
With India aiming to become a $10 trillion economy, SMEs are key to driving this growth. They are at the forefront of innovation and economic development.
(A.2) Regulatory Support
Now, here’s something that’s made a big difference- regulatory support. The Securities and Exchange Board of India (SEBI) has been instrumental in creating a more favorable environment for SMEs to go public. SEBI has introduced a framework specifically for SME IPOs, making the process smoother and more accessible. For instance, they’ve lowered the minimum public offering size and simplified the listing process.
And the results?
In 2023 alone, we saw a staggering 182 SME IPOs. That’s a huge jump from previous years. These relaxed norms have made it easier for SMEs to tap into the public capital markets, opening the door for many businesses that might have otherwise hesitated.
Also, the NSE launched a new set of rules that extensively helped in boosting SME IPOs in 2024. We will discuss this in more detail in the upcoming section.
(A.3) Enhanced Liquidity and Credibility
When an SME goes public, it gains access to capital—money that can be used for expansion, paying off debt, or even just keeping the business running smoothly. But there’s another benefit that’s just as important- enhanced liquidity. Being listed on the stock exchange means that a company’s shares can be easily bought and sold, which is a big plus for both the company and its investors.
This liquidity comes with a boost in credibility. When a company is publicly listed, it has to follow stricter governance standards, making it more transparent and accountable. This transparency builds trust among investors. The numbers tell the story—out of the 182 SME IPOs at the beginning of 2024, 138 of them were trading above their issue prices. That’s a strong signal of market confidence.
(A.4) The Rise of Retail Investors
Now, let’s talk about the role of retail investors. These are the individual investors who are now flocking to the stock market in record numbers. With the rise in Demat accounts and growing interest in stock investments, SME IPOs have become particularly attractive.
Why?
Because they offer the chance to invest in early-stage companies with high growth potential—something that was previously reserved for institutional investors and venture capitalists.
Some of these SME IPOs have been subscribed up to 419 times! That’s a phenomenal level of interest, driven by the potential for high returns. This surge in retail investor participation is one of the key reasons why SME IPOs have been so successful.
(A.5) Government Initiatives
The Indian government has played a significant role in supporting the SME sector. Through a range of initiatives—including tax incentives, subsidies, and programs designed to make financing easier—the government has created a supportive environment for SMEs to thrive. These initiatives don’t just make it easier for SMEs to operate; they also increase investor confidence. When the government backs a sector, it signals to investors that these companies are worth paying attention to.
Note: We have also explained a complete list of government schemes for Women in India. Go through the article for detailed information.
(A.6) Market Dynamics
Lastly, let’s consider the broader market dynamics. The current market sentiment in India is overwhelmingly positive, especially towards sectors with high growth potential. Investors are eager to find opportunities, particularly in industries supported by favorable government policies. This overall bullish trend has created a perfect environment for SME IPOs to succeed.
(B) What are the new NSE Rules?
If you’ve been following the buzz around the stock market, you might have heard about the new rules introduced by the National Stock Exchange (NSE) for Small and Medium Enterprises (SME) Initial Public Offerings (IPOs). These changes are more than just a few tweaks—they’re set to reshape the way SME IPOs function in India, making the market more stable, transparent, and accessible to investors like you.
So, let’s go into the details-
(B.1) 90% Price Cap on SME IPO Listings
Do you know how some stocks can skyrocket in price on their first day of trading? Well, that kind of wild ride might seem exciting, but it can also be risky, especially in the SME market. To tackle this, the NSE has introduced a 90% price cap on SME IPO listings.
What does this mean for you?
Simply put, this rule restricts how much higher the share price can go on the first day of trading compared to its IPO price. This is aimed at curbing excessive speculation—those dramatic price swings that can make or break an investment overnight. By capping the price increase at 90%, the NSE wants to ensure that the price you see on the first day reflects the company’s actual value rather than inflated, speculative hype.
This might sound like it’s limiting your potential gains, but it’s also protecting you from getting caught in a bubble that could burst just as quickly. It’s a trade-off between stability and the chance of quick profits, with the idea being that a more stable market is better for everyone in the long run.
(B.2) Minimum IPO Size Raised to Rs.30 Crore
Now, let’s talk about another significant change—the increase in the minimum IPO size to Rs.30 crore. If you’re wondering why this matters, think about it like this- the NSE wants to ensure that only financially sound and stable companies can tap into the public market. By raising the minimum IPO size, the NSE is essentially filtering out smaller, less stable companies that might be too risky for you as an investor.
This change is a big deal because it aligns with the broader goal of improving the overall quality of companies listed on the SME platform. With this new threshold, you can be more confident that the companies going public are better equipped to handle the challenges of being publicly traded. It’s a move towards quality over quantity, which is good news if you’re looking to invest in companies with solid business models and financial backing.
(B.3) Revised Lot Size Policy
Here’s something that might get you excited- the NSE is considering revising the lot size policy for SME IPOs. If you’ve ever felt that the current lot sizes are just too big, making it tough for you to get in on the action, this could be a game-changer.
Right now, the minimum lot size for retail investors in SME IPOs is Rs.1 lakh, which can be a pretty steep entry point. The NSE is looking at lowering this threshold to make SME IPOs more accessible to a broader range of investors. This change could lead to increased retail participation, meaning more people like you could start investing in these high-potential companies.
By lowering the financial barrier, the NSE is not just making it easier for you to invest, but it’s also boosting market liquidity. More investors mean more trading activity, which can help create a more vibrant and dynamic market.
(B.4) Increased Regulatory Compliance
Now, onto something that might not sound as exciting but is incredibly important— regulatory compliance. The NSE has put a strong emphasis on ensuring that companies seeking to list on the SME platform adhere to various regulations, including the Securities Contracts (Regulations) Act, the Companies Act, and SEBI guidelines.
What does this mean for you?
More transparency and accountability. Companies that comply with these regulations are required to provide detailed disclosures about their financial health and business operations. This makes it easier for you to make informed decisions when deciding whether to invest in an SME IPO.
Increased scrutiny means fewer chances of getting caught up in a company with questionable financial practices.
So, in a nutshell, it is all about protecting you as an investor and ensuring that the companies you invest in are playing by the rules!
