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Greater regulation requirement, lukewarm investor response keeping SMEs away from IPOs

Till date, 359 companies have been listed on BSE’s SME platform with capital raised to the tune of Rs 3,793.57 crore. A total of 128 companies have migrated to the main board while 27 have been suspended for various reasons.

Written by Parthasarathi Biswas | Pune |
Updated: January 12, 2022 7:14:56 am
In Pune, only eight of around 15,000-20,000 SMEs have explored the Initial Public Offering (IPO) mode to raise funds.

Over the last few years, going public or being listed in the exchanges has been emerging as a prerogative for companies. However, even as the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE) have dedicated platforms for the SME (Small and Medium-Sized Enterprises) sector, not many have travelled the path to raise funds for their operations. Experts say greater regulation requirement and lukewarm response from investors towards service-driven SMEs could be the reason preventing the sector from seeking funding the public way.

Till date, 359 companies have been listed on BSE’s SME platform with capital raised to the tune of Rs 3,793.57 crore. A total of 128 companies have migrated to the main board while 27 have been suspended for various reasons.

In Pune, only eight of around 15,000-20,000 SMEs have explored the Initial Public Offering (IPO) mode to raise funds. For a sector that contributes around 33 per cent to India’s manufacturing output, the numbers — both locally and nationally — are relatively low.

Prashant Girbane, director general of Mahratta Chamber of Commerce Industries and Agriculture, agreed that the numbers of listed SMEs is far lower than the potential of the sector. “IPO is one of the best ways of funding growth of SMEs as the cost of funding is cheapest and the branding comes as a positive externality,” he said. He said even though listing requires better discipline in managing accounts and overall governance, it also helps in sustainable growth of the firms.

The hesitation, many say, works both ways as both the SMEs as well as investors are reluctant in terms of the former getting listed on the bourse.

Milind Padole, managing director of Pune-based Affordable Robotic and Automation Limited, which had gone public in 2018, said, “There was a time in our journey where we were looking for funds to grow faster. We explored going to private equity too but then finally decided to get listed on BSE SME.” Four years down the line, Padole feels the process of listing was not “very complicated.” He said, “It requires 85% of the compliances required for private limited companies. Once you go public, you require three independent directors, one full-time chief financial officer and one full-time chief secretary,” he said. Following the IPO, the company, Padole said, was on a much faster growth rate than previous years.

Asked why most SMEs fail to take the public route to fund-raising, Padole listed out several reasons one of which is lack of interest by investors. “The companies that are not futuristic or do not have headroom for scalability can rarely attract retail investors or HNI (High Net-worth Individual) investors in the SME space,” he said. “SMEs, mostly, are vendors to bigger companies; rarely do SME companies have their products. Companies that are in service or are dependent on some OEM (Original Equipment Manufacturer) find it difficult to attract investors. This, in turn, poses difficulties for them to get listed. Since SMEs are majorly small and medium-scale companies looking to grow, they need to have a clear idea of what their aim is as well as their vision and mission,” he added.

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