A persistent enthusiast and passionate leader, Rajesh is an expert in Finance and Technology who firmly believes in empowering employees to take action and disciplined decision-making. He pursued his graduation in B.Tech, Electronics & Communication from Lala Lajpat Rai Institute of Engg. & Tech., Moga. Rajesh has expanded his expertise by strategically implementing and setting up teams in Snapdeal, Vdopia, and Amazon.

SME IPOs offer investors an opportunity to invest in the early growth stages of small and mid-sized companies. These IPOs allow investors to support promising businesses during their early growth stages, offering the potential for significant long-term returns.

According to SEBI, SMEs are defined based on their paid-up capital and annual turnover:

1. Micro Enterprises: Companies with a Capital Investment of up to ₹1 crore & turnover of up to ₹5 crores.
2. Small Enterprises: Companies with an investment of ₹10 crores & a turnover of over ₹5 crores but not exceeding ₹50 crore.
3. Medium Enterprises: Companies with an investment of ₹50 crores & a turnover of over ₹50 crores but not exceeding ₹250 crore.
4. RBI (Reserve Bank of India) also recognizes SMEs but for lending. Although the limits mentioned under the definition remain the same as SEBI.

Why should investors prefer investing in SME IPOs?

Investing in Small and Medium Enterprises (SME) IPOs presents a rewarding opportunity for investors aiming to diversify their portfolios and tap into the growth potential of small and mid-sized companies.

Taking a closer look at the SME Index performance reveals an exciting trend: Small and Mid-sized Enterprises (SMEs) consistently outperform established benchmarks like the Nifty 50 and the Nifty Small Cap 100. Over the past five years, SME indexes have shown a Compound Annual Growth Rate (CAGR) of 31%, compared to 15% for the Nifty50 and 19% for the Nifty Small Cap 100, indicating almost 1.5-2x the growth.

With government initiatives such as easier loans through the Mudra scheme, tax benefits, and programs like ODOP & PLI scheme, the future of SMEs looks promising.

States aren’t too behind either. For instance, Delhi is planning to set up dedicated Centers of Excellence for SMEs. Uttar Pradesh is planning to organize an SME Mart which will help SME entrepreneurs in facilitating business connections to expand their business.

For accredited investors, this presents an opportunity to make significant gains by investing in SME companies. Let’s explore how to secure allotment in SME IPOs.

In what capacity can investors apply for SME IPOs?

There are three ways through which an individual can apply for SME IPOs namely:

Retail Investor: Direct investment in SME IPOs allows investors to participate in the early growth stages of small and medium-sized enterprises. By opening a demat account with a registered stockbroker or intermediary, investors can apply for shares during the IPO process. However, this process often suffers from a lack of access and liquidity, resulting in a challenge for retail investors to secure quality shares through allotment, despite the minimum ticket size being ₹1,00,000/-. Many good IPOs get highly oversubscribed.

For instance, in the case of Tac Infosec, which allotted 9,40,800 shares for Retail Investors, applications for 40,81,16,400 shares were received, showing a multiple of 433x. Similarly, in the case of Owais Metal and Mineral Processing, where the issue size was ₹42.6 Cr., the amount raised was close to ₹6,148.41 Cr. Out of this, only 15,98,400 shares were allotted to Retail Investors, while application bids stood at a whopping 39,72,08,000, showing a 248.5x multiple.

High Net Worth Individual (HNI): Similarly, High Net Worth Individuals often fall prey to the lottery system of allotment, especially in highly oversubscribed offerings. Even if HNIs are ready to invest ₹10,00,000/-, they may fail to get an allotment as the lottery system is based on luck.

For example, in Tac Infosec, While the issue size was ₹29.99 Cr., the IPO raised over approximately ~ ₹8,417 Cr. Out of 4,03,200 shares that were offered to HNIs, while application bids were placed for 31,00,15,200 shares, resulting in a multiple of approximately ~ 769x.

Owais Metal & Mineral Processing, another SME company, launched its IPO this year. Among the allotments, the shares offered to HNIs stood at 6,84,800, whereas the application bids offered for shares to HNIs stood at 22,55,44,000, reaching a multiple of approximately ~329.36x.

In other words, out of every 769 & 329 HNIs who invested in these respective IPOs, only 1 HNI got an allotment through the lottery system. The lottery system is wholly dependent on luck. As a result, many HNIs were unable to get an allotment.

Investing in Small and Medium Enterprises (SME) IPOs presents a rewarding opportunity for investors aiming to diversify their portfolios and tap into the growth potential of small and mid-sized companies

Anchor Investors: The Anchor Investor process is rapidly gaining traction among investors as the demerits faced in the Retail & HNI process don’t apply here. Unlike the earlier process where investors were competing to get an allotment, in this process, Anchor investors sit at the table with the merchant banker & unlike the lottery process, here the merchant bankers get to choose the AIFs & vice-versa.

There are a few VC Funds & AIFs such as Planify VentureX Fund that solely focus on SME companies & sit as an anchor investor in their IPO proceeds. Since these are professional bodies, they not only oversee the process of investment but also when to exit from these SMEs, making the entire process of investment hassle-free. To get assured allotment to SME IPO opportunities, such VC Funds & AIFs are the best option.

Conclusion

Investing in SME IPOs presents an enticing opportunity for investors prepared to take calculated risks and conduct thorough research. By carefully assessing valuation, staying informed, and implementing effective risk management strategies, investors can significantly enhance their chances of securing their share in SME IPOs.