‘Stocks on the SME platform are in a sweet spot’

The SME platform on the exchanges has evolved over the last five years and close to 360 companies are listed on the BSE and the NSE put together. They have raised close to ₹3,700 crore with average capital raised being ₹10-13 crore. Fifty per cent of these companies have less than ₹50 crore turnover and average turnover of these companies is ₹75 crore.

So, when companies in the initial point of inflexion in business cycle get growth capital, it helps boost growth. For instance, for a company with ₹100 crore turnover, it is not too difficult to achieve 10 times growth in four to five years.

These companies have graduated from the initial phase of struggle but have not grown large enough to make a growth plateau. They are in a sweet spot. It is, therefore, not surprising that these companies have given the best returns among equity categories. It’s a very good tool for portfolio diversification for investors.

The Pantomath SMEX30 index has delivered CAGR of 83 per cent over the last four years. We have completed 70 SME IPOs so far and raised maximum funds close to ₹1,000 crore on the SME Exchange.

The due diligence and the processes are similar, but since the size is small, the magnitude of marketing is lesser. That’s why many of these stocks remain under-researched and that’s where the opportunity lies for investors.

There are five key differences. One, the offer document is not under SEBI’s supervision, the in-principle approval is given by the exchanges. But the level of assessment remains the same. Two, the IPO subscription and trading take place in lot size of minimum ₹1 lakh.

Three, given the smaller number of trades, market making is mandatory to improve liquidity. Five per cent of the IPO has to be purchased by the market-maker to meet his sell obligation. Twenty-five per cent of the IPO is the buy obligation of the market maker and he has to give two-way quote, for buying and selling.

Four, the minimum number of shareholders in SME IPO is 50. Fifth, the SME IPOs are 100 per cent underwritten.

There have been some relaxations in listing compliance since these are smaller companies. Requirements to publish results in newspapers, circulation of annual reports and e-voting facilities are not required to be provided by these companies.

SME companies can report results half-yearly, e-mail this to the exchanges and put it up on their website. But other than this the governance structure remains the same in terms of women directors, independent directors, audit committees and most of SEBI regulations, including takeover regulations, insider trading prevention, and so on, apply here as well.

They all have websites, it is mandatory. And all the offer documents, half-yearly reports, etc, are available on the website as well as on exchanges.

Using behavioural analysis such as looking at the social standing of the promoter or the company, whether the promoter has other conflicting business, whether the business is run out of multiple locations, customer satisfaction, and payment track-record will give a sense of dependability of the business. Investors can also check if there is any adverse comment about the company in websites such as watchoutinvestors.com, CIBIL, etc.

Brokerages are only just beginning to cover them. But these are giants in the making. So I appeal to all brokerages to take a look at these SME companies as well.

This is more of a capital formation platform. This is not a traders’ market. Investors with a short-term horizon should, therefore, stay away. Those investors with the capability to hold for the medium to long term can invest in these companies.

Notably these companies have the option to migrate to the main board after two years if their paid-up capital is ₹10 crore. Once they do that, the liquidity is similar to that of other companies on the regular platforms. Forty-eight companies have already migrated to the main board.

Given the strong growth in business and market-cap of many of these SME companies, many institutions have begun tracking and investing in these companies; HSBC MF, BlackRock and Sundaram MF are now investing in these companies at both primary and secondary levels.

Some of the ace investors who participated in SME IPOs at pre-listing and post-listing stage, for instance, Madhusudan Kela invested in IRIS Business Services; Mukul Agarwal invested in Mohini Health & Hygine; Vijay Kedia invested in Innovators Facade Systems; Jaspal Bindra and Chandir Gidwani invested in One Point One Solutions to name a few.

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