On India’s Bourses, SMEs Might Just Be Coming Of Age
SME listing on India’s stock exchanges see a spurt; here’s why...
It’s been about five years since India’s two largest stock exchanges decided to launch dedicated platforms to encourage the country’s small and medium enterprises to tap the capital market. If the number of recent issuances are anything to go by, the teething issues might just have begun to fade.
The National Stock Exchange’s ‘Emerge’ platform for SMEs is now nearing the 100 mark, with over half of that number having taken the primary market plunge this financial year. As many as 19 listed in October. The BSE, which started its SME platform only months before the NSE, has hosted 207 SMEs till date, 34 of which have migrated to the main board.
So why are SMEs suddenly mustering the courage to tap the primary market?
“It is a factor of the general mood in the investor community,” said Sudip Bandyopadhyay, group chairman at Inditrade Capital.
There is sufficient liquidity. And there is a positive bias in the investor community, which is reflected in the number of listings being seen in the primary market.Sudip Bandyopadhyay, Group Chairman, Inditrade Capital
Indeed, in the first half of 2017, Indian stock exchanges saw 57 initial public offerings, in which companies raised $2.3 billion, according to a report by accounting firm EY.
The NSE’s ‘Emerge’ platform now has 97 SMEs listed on it, with a total market capitalisation of around Rs 7,000 crore, the exchange told BloombergQuint. The market capitalisation of all the companies ever listed on the BSE-SME platform is much higher at just under Rs 18,000 crore, but the 173 currently listed have a market capitalisation of just under Rs 11,500 crore.
The start is admittedly small. To put things in perspective, the market capitalisation of Reliance Industries Ltd. is close to Rs 6 lakh crore.
Working The Land, Sowing The Seeds
The positive sentiment is currently luring previously wary entrepreneurs to the primary market. But could it just as easily turn the other way? Ravi Varanasi, the head of business development at NSE, is of the opinion that there is a lot more at play here than mere sentiment.
This is not exactly on account of the liquidity in the system. I mean these are small issues. The average size is Rs 13-14 crore. The range is anywhere between Rs 5 crore and Rs 50 crore, but the average size is low. So liquidity is not really the concern. So what we’re seeing is initial reluctance from the point of view of entrepreneurs has come down.Ravi Varanasi, Head (Business Development), NSE
Ajay Thakur, the chief executive officer at BSE-SME, shares Varanasi’s view.
“We don’t think that this is on account of the additional liquidity,” he said. “More likely, the awareness that has been created over the past five years started showing results about a year and a half back.”
Representatives of the two exchanges have been meeting with entrepreneurs for the past five years now, both Thakur and Varanasi told BloombergQuint. While Thakur’s team has met about 20,000 companies, Varanasi’s has tapped all the major ‘SME clusters’.
With the ground work having been laid, SMEs are now approaching the exchanges of their own volition and investors are increasingly becoming aware of the potential they have to offer.
In the recent past we have seen AMCs (asset management companies) putting money into SMEs, couple of FIIs (foreign institutional investors) have invested, and HNIs (high networth individuals) are also putting money into these issuances. So the awareness among the issuers and investors has increased and that has really changed the game.Ravi Varanasi, Head - Business Development, NSE
Varanasi also believes there is a ripple effect. SMEs can generally be found in geographical clusters. When an SME from a particular area, say Ranchi or Jamshedpur, successfully taps the market, others in the area are emboldened to attempt an issuance as well.
The other aspect is the work being done by merchant bankers has visibly gone up. Initially only a handful of merchant bankers did SME issuances, primarily because the fees did not justify the allocation of manpower and resources. Now, there are close to two dozen who work in concert with the NSE to list SMEs, Varanasi said.
What’s more, a large number of these merchant bankers only work on SMEs.
The Litmus Test
Whether or not the mood in the market is responsible for the spurt in SME issuances, the undeniable fact is that such companies have huge unlocked potential, especially for investors with a little risk appetite.
According to the Ministry of Micro, Small and Medium Enterprises, there are over 2.3 lakh SMEs and over 20 lakh micro enterprises in India today. These entities, as a collective, contributed around 30 percent of India’s GDP in the financial year ending March 2015.
“I am happy, as an investor, that SMEs are getting traction. But the true test of the success of the platforms will come when there is a downturn,” said Bandyopadhay.
The exchanges, for their part, are taking care to filter the entrants on the exchange. Only companies with a proven track record are allowed access.
The NSE demands that companies have a three year track record, with positive cash flows in at least two of those years, said Varanasi.
Given the current euphoria in the market, with the benchmark indices testing lifetime highs every odd trading session, SME issuances are expected to pour in. The question is, will they continue to do so when the going gets tough. That will determine whether they have come of age.