Why an SME IPO is the Perfect Growth Strategy for Your Business

Most economies are propelled by small and medium enterprises (SMEs), which also foster innovation, job generation, and GDP growth. But growing these businesses often requires a lot of capital, which is a barrier to scaling and can inhibit their growth potential. One of the potential growth strategies that are increasingly popular is an SME IPO to obtain initial funds, publicity, credibility, and long-term benefits.

The buzz surrounding smaller companies or SMEs making their debut on the stock exchanges is impossible to ignore. Here, we explore why an SME IPO might be the perfect growth strategy, supported by real-life examples.

    This showcases the top 5 SME companies with the highest absolute returns from listing to current market price.

What is an SME IPO?

An SME IPO allows small and medium businesses to raise equity capital by listing on dedicated platforms like the NSE Emerge or the BSE SME Exchange. Unlike traditional IPOs, SME IPOs are tailored for smaller companies, with less stringent regulatory requirements and reduced costs, making them an accessible option for businesses with growth potential.

1. Access to Capital for Expansion

SMEs pursue an IPO primarily to have access to significant capital, which can be utilized for various purposes such as expansion, research and development, or debt repayment. By going public, SMEs secure immediate equity funding to support growth initiatives, invest in technology, upgrade infrastructure, or reduce financial liabilities.

Example: Insolation Energy Ltd, a solar panel manufacturer, raised funds through its IPO in 2022 enabling it to expand its production capacity and explore new markets. 

*Before listing (listed on Oct 22)

2. Enhanced Credibility and Brand Visibility

An IPO enhances a company’s credibility among customers, suppliers, and investors. However, stock exchanges are also in the business of providing transparency and regulatory compliance to attract business. Being listed on a stock exchange elevates your company’s brand and inspires confidence in the stakeholder. More customers, vendors, and partners are attracted to a listed company due to its transparency & compliance.

Example: D P Abhushan Ltd, a jewellery retailer, leveraged its IPO in 2017 to enhance its brand appeal and gain a competitive edge in the market.

*Before listing (listed on Oct 17)

3. Liquidity for Founders and Early Investors

SME founders and early investors have the opportunity to diversify their ownership by pursuing an IPO. This approach not only reduces risk but also provides an exit strategy for those looking to sell a portion of their shares. Additionally, it enhances the appeal of the business to both institutional and retail investors. 

Example: Suyog Telematics Ltd, a provider of telecom infrastructure, raised funds through its IPO in 2013. The company used the IPO to provide liquidity to early investors.

*Before Listing (Listed on Jan14)

4. Opportunity to Tap into Growth Markets

Publicly listed companies can access growth markets more effectively. Being listed provides the capital and credibility needed to explore new geographies or product lines.

Example: Knowledge Marine & Engineering Works (KMEW), specializing in marine services, raised funds through its IPO in 2021 to acquire advanced equipment and expand its services to international markets. This strategic move resulted in significant revenue growth.

*Before Listing (Listed on Mar 21) 

5. Tax Benefits and Regulatory Support

Listed SME IPO companies in India benefit from lower long-term capital gains tax rates compared to unlisted shares. Many governments also support SMEs pursuing IPOs through tax incentives and regulatory assistance.  

For instance, Indian platform SMEs (NSE Emerge, BSE SME) have coined easier listing procedures and relaxed compliance requirements to attract more SMEs to participate.

6. Long-term Growth and Sustainability

Raising money is not the only reason to go public; it also enforces financial discipline and transparency that helps long-term growth. Public scrutiny and governance standards push SMEs to perform better and remain accountable.

Example: D P Abhushan Ltd has reported consistent growth post-IPO, driven by improved governance and access to capital. Its success underscores the long-term benefits of adopting transparent practices and leveraging public markets.

Challenges to Consider

While an SME IPO offers numerous benefits, it’s essential to consider potential challenges:

• High Costs: The cost of listing, including underwriting and compliance, can be significant.
• Market Volatility: Stock prices are influenced by market conditions which are unpredictable.
• Regulatory Compliance: SMEs need to adhere to stringent regulations post-listing.

Conclusion

An SME IPO is not just about raising money, it’s a chance for the business to transform to the next height. With access to capital, increased credibility, and expansion opportunities, an IPO can be the perfect growth strategy for SMEs poised for scalability. Real-life examples like Insolation Energy Ltd, Suyog Telematics Ltd, Knowledge Marine & Engineering Works, Sangam Advisors Ltd (WRTL), and D P Abhushan Ltd highlight the potential of this route. However, thorough preparation, understanding market dynamics, and aligning with long-term goals is essential to maximizing the benefits of going public.