Small and medium-sized enterprises (SMEs) are the backbone of any economy, providing employment and driving innovation. However, these businesses often face challenges in accessing capital, limiting their ability to grow and expand. One way to unlock the potential of SMEs is through initial public offerings (IPOs).
As per recent statistics, the fiscal year 2022–23 (April–March) saw India’s small and medium-sized businesses (SMEs) raising Rs 2,229 crores through the initial public offering (IPO) process, a 130% increase over the previous year.
An IPO is the process of a private company offering shares to the public, thereby becoming a publicly traded company. This allows the company to raise capital from a wide range of investors, including institutional investors, retail investors, and even the general public. By listing on a stock exchange, a company gains access to a pool of capital that can be used to fund growth initiatives, acquire new assets, or pay down debt.
IPOs can be particularly important for SMEs because they often lack the financial resources to pursue growth opportunities. Banks and other traditional lenders may be hesitant to lend to small businesses, leaving them with few options for funding. Moreover, venture capital and private equity firms often require a significant ownership stake in exchange for investment, which can be a difficult decision for founders who want to retain control of their business.
Relaxations for SME IPO
Small and medium-sized businesses may establish their brands using the platform offered by SME IPO (SMEs). Compared to Mainboard IPO, SME IPO offers significantly simpler & more flexible processes & eligibility. The main board IPO procedure is really difficult and necessitates a lot of paperwork.
In contrast, SME IPO is significantly easier to qualify for and has less onerous requirements. It becomes a far more appealing choice for small and medium-sized businesses as a result.
The requirements for an SME IPO are substantially more straightforward. The minimum net worth requirement for an SME is simply Rs. 3 crores, as compared to Rs. 500 crores for the main board IPO. Also, compared to the main board IPO, which requires a minimum track record of 7 years, an SME just needs a track record of 3 years.
The SEBI Exchange, a stock market specifically for SMEs, allows SMEs to list their securities. They get greater prominence as a result, and more investors are drawn to them. Also, compared to the major stock markets, the SME Exchange’s listing standards are more liberal.
Reinforcing brand identity
SME IPOs fuel vitality into SMEs and propel themselves to establish relationships with prospective clients and investors and forge a distinctive and enduring brand identity. The platform also offers SMEs a wide range of tools and assistance, such as marketing and public relations services, which may help them expand their market reach and create a successful, long-lasting company
Initial Public Offerings often allow a company to raise capital without diluting ownership or control. The funds raised through an IPO can be used to pursue growth initiatives, such as expanding into new markets, investing in research and development, or acquiring new businesses. In addition, an IPO can enhance a company’s credibility and visibility, which can lead to increased interest from customers, suppliers, and potential employees.
Another benefit of an IPO is increased access to capital markets. Once a company is listed on a stock exchange, it can issue additional shares or debt securities, allowing it to raise additional capital in the future. This can be particularly important for SMEs that may need to raise additional capital as they grow and expand.
The ifs and buts, if any
However, an IPO also comes with certain risks and costs. The process of going public can be time-consuming and expensive, with legal, accounting, and regulatory requirements that must be met. Additionally, the increased scrutiny and reporting requirements that come with being a publicly traded company can be burdensome for SMEs, which may lack the resources to maintain compliance.
Moreover, the public markets can be volatile, and SMEs may find it difficult to attract and retain investors. The success of an IPO depends on many factors, including market conditions, investor sentiment, and the quality of the company’s financial statements and disclosures.
In conclusion, an IPO can be an important tool for unlocking growth and accessing capital. By going public, SMEs can raise funds, enhance their credibility, and gain access to capital markets.
However, SMEs must carefully weigh the costs and risks of an IPO before deciding to pursue this path. Ultimately, the decision to go public should be based on a thorough assessment of the company’s growth prospects, financial needs, and overall business strategy.