Democratizing Capital: How IPOs Empower SMEs to Scale Up in 2023
Since the launch of BSE SMEs and NSE Emerge in 2012, more than 800 SME IPOs have been successfully listed, and this number is only increasing.
As businesses have started to recognize the benefits of seeking equity investment, there has been a considerable surge in the number of Small and Medium Enterprise (SME) IPOs in India in recent years. The money raised after the listing is called SME IPOs, generally ranging from Rs 3 crore to Rs 50 crore. These initial public offerings (IPOs) are listed on the National Stock Exchange (NSE) Emerge and Bombay Stock Exchange (BSE) SME platforms.
These exchanges had 109 initial public offerings in 2022, raising a sizeable sum of Rs 1,980 crore. Comparatively, there were 59 and 27 SME IPOs in 2021 and 2020, respectively. 76 SME IPOs have already been registered as of June 2023, demonstrating a good change in this trend. What has changed? That is the question. Why are more SMEs choosing initial public offerings (IPOs) to support their debt and other funding options?
Historically, SMEs needed more choices for raising money. They had two options: use loans or invest their own money. Nevertheless, borrowing money from one’s resources has its limitations over the long term, and loans sometimes have terms like collateral requirements, recurring interest costs, and prohibitions on utilizing the money for crucial activities like marketing or research and development (R&D). Moreover, taking on debt may weigh down the balance sheet and prevent corporate growth, particularly in trying times.
In light of these difficulties, SMEs have begun investigating alternate finance sources, such as equity financing. The SME Initial Public Offering (IPO) is one of these options, which has several advantages and enables companies to democratize finance and realize their full growth potential.
Access to capital finance and the opportunity for value development are two of the most obvious benefits of going public with a corporation. SMEs can realize their full development potential by using the money acquired through an IPO for various objectives they may otherwise be hesitant about.
They may, for instance, set aside money for research and development (R&D) projects or spend money on marketing and brand development, which would significantly affect their trajectory of growth as a whole.
Additionally, raised funds frequently give a company 2x–3x leverage when increasing debt. As an illustration, suppose a SME successfully raises Rs. 5 crore through its IPO. In such an instance, while looking for further debt financing, it may be able to leverage its balance sheet by around Rs. 10-15 crore (considering different aspects). This leverage can give SMEs more financial resources and flexibility to support their development plans and achieve their growth goals.
Unlike typical debt financing, the money raised through an IPO does not have set payback terms or cost cash for interest. It relieves SMEs of worry and pressure, allowing them to concentrate on their primary company activities and expansion plans. SMEs may maximize expansion prospects and foster corporate growth by alleviating the stress of repaying loans within predetermined deadlines. Investors can profit from capital growth over time, simultaneously giving them returns on their investments.
SMEs may focus on important facets of their businesses, such as product creation, market penetration, and operational efficiency, with peace of mind and independence thanks to this advantageous environment. SMEs may improve their competitive position, expand their market share, and promote sustainable growth over time by using the cash obtained wisely.
While capital funding and valuation growth are two significant advantages of going public, it is crucial to remember that SMEs should carefully assess their financial goals, business strategy, and the fees and duties of being a publicly traded company.
To maximize the benefits and results of an IPO, careful preparation, adherence to legal regulations, and good communication with investors are crucial. SMEs may manage the complexity of the IPO process and maximize capital funding. Valuation benefits it offers by seeking expert advice, including that of investment bankers and legal consultants.
Reputable exchanges like the BSE SME and NSE Emerge provide worthwhile visibility chances for companies operating across various industries. This feature is beneficial for SMEs who cater to customers. SMEs may build their brand visibility in the market and obtain a competitive advantage over their rivals by becoming listed on these exchanges.
Consider, for instance, a local auto manufacturer that is well known in its immediate area. However, an SME may get widespread recognition by listing on an exchange. The ability to contact new customers, enter new markets, and enhance sales is given to the company by this elevated exposure.
Interestingly, this benefit may be obtained without incurring additional costs, making it a compelling option for SMEs looking to strengthen their market position and brand awareness.
Small and medium-sized businesses may already have internal accounting compliance mechanisms, but becoming publicly traded also requires adherence to exchange rules. It involves conforming the balance sheets and other financial reporting to the exchange standards.
For instance, an SME must carefully compile and submit financial reports, corporate audits, and compliance reports to pursue a listing on the exchange and go through IPO screening. To guarantee regulatory compliance, businesses must also assemble several acts, such as the Companies Act.
Due to the increased emphasis on compliance, SMEs must maintain openness and discipline in their internal processes. By following the exchange’s reporting requirements, SMEs can learn important information about their financial situation, such as year-over-year sales, a cash flow analysis, and potential future difficulties. It allows SMEs to make well-informed decisions that consider prospective hazards and their financial performance.
SMEs can improve organizational discipline, promote financial reporting transparency, and cultivate a culture of regulatory adherence by strengthening internal compliance controls. This, in turn, increases investor confidence and strengthens the SME’s overall credibility in the market.
SMEs must understand the need to keep accurate and current financial records and adhere to the exchange’s regular reporting requirements. SMEs may manage their internal compliance needs efficiently and ensure timely and accurate reporting to fulfil the exchange’s criteria by consulting professionals and implementing strong accounting and compliance systems.
SME IPOs are gaining popularity in India. However, investors still prefer mainstream IPOs. Over 800 SME IPOs have been successfully listed since the launch of BSE SMEs and NSE Emerge in 2012, and this trend is only continuing to rise.
However, SMEs may need help throughout the SME IPO process. Following the required steps and precisely determining the right price for the IPO might be challenging. Finding the best merchant banker to help with the process is also essential.
Businesses should seek the advice of financial experts who can supervise the entire process, assist in overcoming these difficulties, and guarantee the best outcomes. These professionals may help with various issues, including valuation, book building, and the listing process, eventually allowing SMEs to realize their full potential and easily support expansion.
As we sail through the third quarter of 2023, one prevailing trend in the financial world is the democratization of capital, mainly through Initial Public Offerings (IPOs). The increased access to public markets for small and medium-sized enterprises (SMEs) has never been more apparent or beneficial.
An IPO is when a privately-held company sells a portion of its equity as shares. This process converts a private company into a public entity. It is a milestone for many enterprises and can lead to several benefits, including raising capital, enhancing the company’s public image, providing an exit strategy for early investors, and allowing the company to acquire other businesses through its shares.
The democratization of capital refers to making capital markets, including IPOs, accessible to a broader range of businesses and investors. Traditionally, IPOs were a financial tool available only to large corporations. This landscape has changed over the years due to various technological advancements, regulatory changes, and shifts in investor mindsets. In 2023, we’re seeing an increasing number of SMEs taking advantage of the democratization of capital to fuel their growth and expansion.
Technological advancements have democratized access to capital. Online trading platforms make it easier for investors to participate in IPOs, expanding the potential for SMEs. New media streamline the IPO process, making it more efficient and less costly. This technology has made the IPO process more accessible to SMEs, which may not have the resources to navigate a traditional IPO.
Regulatory shifts have also played a role in democratizing access to capital. Around the world, regulators have been making it easier for SMEs to go public. These changes include easing listing requirements, reducing the costs associated with going public and introducing new types of public listings, such as direct listings and Special Purpose Acquisition Companies (SPACs).
Despite the numerous benefits, SMEs face challenges when considering an IPO. These include the costs associated with going public, the need for increased transparency, and the pressure of meeting quarterly earnings expectations. SMEs may also face challenges in managing the increased scrutiny and regulatory compliance that comes with being a public company.
The trend of democratizing capital through IPOs is expected to continue, driven by technological advancements, regulatory changes, and the resilience and innovation of SMEs themselves. While challenges remain, the benefits of going public for SMEs are significant, and the ability to tap into the public markets can provide a crucial avenue for growth and expansion.
Democratizing capital through IPOs has proven to be a powerful tool for SMEs’ growth and development in 2023. It allows them access to funds and opportunities previously unavailable, boosting their chances of success in an increasingly competitive global market. It is crucial, however, to continue addressing the challenges SMEs face to ensure that this democratization continues to be as inclusive and effective as possible.
