What are the benefits of SME IPO? How do SME companies benefit from stock market listing?
As a promoter of Small and Medium Enterprise (SME), this question might have crossed your mind several times. Well, this is a perfect place to find answers to all your queries related to the advantages of SME IPOs.
To begin with, SME IPOs offer benefits to business owners at different levels. Owing to these numerous advantages over other avenues, SME IPOs have become quite popular with promoters and this is very well reflected in the number of offers and the amount raised through these public offers.
In the first 5 months of CY 2024, the SME IPO market witnessed substantial activity with 100 listings. These IPOs delivered an impressive average return of 71%, reflecting strong investor interest and market optimism. The average IPO size stood at INR 31.69 crore, indicating a healthy influx of capital into the small and medium enterprises sector. In comparison, a total of 179 SME IPO listings took place in 2023, raising an average value of INR 26.75 crore. These SME IPOs – including the listings on NSE and BSE – delivered an average return of 36.68% to investors. The market is rewarding SME IPOs this year in almost all departments and this is great news for business owners and company promoters.
Having established the growing acceptance of SME IPOs in the investing circles, let’s go back to the original topic of the distinct advantages of SME IPOs. Here are the key benefits of SME IPO.
Benefits of SME IPO for Companies
Table of Contents
#1Â Access to Capital
By definition, SMEs are small and medium businesses and this means that these growth-oriented businesses need capital to scale up their operations. At the same time, SMEs might be quite lower on the priority lists of banks. Even when lending, banks and financial institutions may impose stringent conditions on SMEs.
Through SME IPO, business owners can access funding from a wider pool of investors, to support their growth needs. This wider pool also means the absence of restrictions in entering new markets, diversifying product range/reducing debts, or providing for working capital.
Also Read:Â All About SME to Mainboard MigrationÂ
#2Â Enhanced Credibility and Visibility
One of the key benefits of SME IPO listing is the immediate boost in the credibility and visibility of the company. This increased recognition can help in attracting more and better business opportunities, including partnerships and contracts, as listed companies are perceived as more reliable and stable compared to their unlisted counterparts.
#3Â Exit Strategy for Existing Investors
In many cases, SMEs are often bootstrapped businesses with early-stage funding offered by friends and family members. However, an exit becomes difficult for these investors as it often means that the business owner will need to buy them out.
An IPO provides an excellent exit route to such investors and even founders looking to realize some gains from their investments. SME IPO route offers liquidity, allowing them to sell part or all of their stake at a market-driven price.
#4Â Employee Retention and Incentives
SMEs can use stock options as a strategic tool to attract and retain talent. Offering shares to employees aligns their interests with the company’s success and can be an effective retention and motivational tool that encourages loyalty and dedication.
#5Â Better Valuation and Access to Cheaper Capital
Publicly traded companies often enjoy higher valuations than their private counterparts. A higher valuation can lead to cheaper capital costs when raising debt, as the company’s equity is seen as more valuable as collateral.
#6Â Facilitating Acquisitions
With access to equity markets, SME owners can use their publicly traded stock as a currency for acquisitions. This can be an efficient way to grow and expand into new markets or segments without raising additional debt. When used correctly, this is a huge advantage for company owners.
#7Â Growth Opportunities
Apart from funding acquisitions through equity, promoters can also use the equity route to unlock a plethora of growth opportunities at subsequent stages. Increased access to capital and improved financial visibility can enable companies to expand their operations, invest in new technologies, and explore international markets.
As can be seen above, the advantages of SME IPOs are manifold and often straddle the range of direct and indirect benefits. While the process of getting listed on stock exchanges can be daunting for uninitiated company promoters, the advantages of SME IPO outweigh the disadvantages.
Are you looking to raise funds for your business? If yes, we can offer end-to-end valuable assistance in your fund-raising journey.
Benefits of SME IPO Listing FAQs
What are the advantages of SME IPOs?
The benefits of SME IPOs include access to capital, enhanced credibility and visibility, an exit strategy for existing investors, better valuation and access to cheaper capital, and more.
What are the risks involved in participating in SME IPOs?
Nevertheless, we advise investors to comprehend the risks associated with SME stocks, including larger lot sizes, lower credibility, smaller scale of company operations, and limited financial performance track record.
