Indian IPO market has evolved over time with different categories of companies issuing IPOs. Series of IPOs from established firms raising thousands of crores on the Mainboard and small-sized companies on the fast track attracting retail investors through SME IPOs indicate how exciting the IPO market has become. Every month, launch of every new IPO becomes the talking point and so do questions of whether to go for SME IPOs or Mainboard IPOs.
Although both are methods through which companies raise capital from the public, IPOs and FPOs vary in company size, regulations, investment requirements, liquidity, listing channels, and risk. A majority of first-time investors wrongly believe that all IPOs are the same. This knowledge will help you make wiser investing decisions and minimize risk.
This information handbook aims to cover everything you need to understand about SME IPOs and mainboard IPOs, the workings, and the pros and cons that these offer and which of the two may be more appropriate for your investment requirements.
What Is an IPO?
The Initial Public Offering (IPO) is when a private company gets the opportunity to sell its shares to the general public. This method is used by businesses to gain finance for their expansion, gain developing status, settle big debts, buy other companies or to improve their current financial output. The company’s shares can be bought or sold on the stock market. In the case of India, the Securities and Exchange Board of India (SEBI) supervises the process.
But every company selling its shares on the stock market is not identical. Depending on its size and strength, the company can opt for the SME platform or the Mainboard platform.
Understanding Mainboard IPOs
Main board IPOs come from somewhat bigger firms with better financial performance, running operations, and greater capital requirements. Offerings list on the National Stock Exchange or the Bombay Stock Exchange and are open to millions of investors around the country.
Owing to their size they are also more likely to attract institutional investors like mutual funds, insurance companies, banks and foreign portfolio investors.
Several of the largest listed businesses in India, such as major banks, technology companies, manufacturing companies and consumer brands, made it to the stock market via the Mainboard IPO.
What Is an SME IPO?
SME stands for Small and Medium Enterprises. SME IPO provides opportunity for smaller enterprises to raise money from public without satisfying rigorous eligibility norms applicable for bigger enterprises.
Rather than listing on the traditional NSE or BSE forums, these companies are listed on NSE Emerge or BSE SME . These dedicated forums make use of to enable developing companies raise access to capital markets and investors to invest in growth businesses at an early stage.
Majority of the SME companies operates in manufacturing, IT services, engineering, care givers and health care, logistics, processing industry including food and chemicals, education and other services.
Due to their smaller size, these companies have a higher business risk than companies traded on the Mainboard.
Key Differences Between SME IPO and Mainboard IPO
While both types allow companies to access the capital markets, and together enable companies to raise capital, the distinctions between the two are significant.
Mainboard IPOs: usually the bigger companies, have larger income and issue size, higher profile thus more price sensitive. SME IPOs: mainly smaller companies and medium companies require funds for expansion
Investment requirements are also quite different; SME IPOs on the whole asks one to buy large quantities, requiring the investors to apply for much bigger lot sizes and larger amounts as application money. Sometimes it could be more than 1 lakh in one application and in mainstream IPOs it normally is much lower.
The second major difference is liquidity. Mainboard stocks generally see more trading activities, providing greater liquidity of shares for investors to buy and sell shares. SME stocks on the other hand, usually have less liquidity, hence, exits are more time-consuming without price adjustments.
Institutional participation is appreciably higher in Mainboard IPOs as big investors look out for companies with large operations and predictable cash flows. Though there is comparatively lower institutional participation in SME IPOs, it has been on the rise with better investor appetite.
Why Are SME IPOs Becoming Popular?
SME IPOs have gained huge popularity in recent years. Many have spectacular listing gains, targeting retail investors who are looking for most returns.
The broad availability of digital investing opportunities coupled with increased financial consciousness could lead to a proliferation of Indian startups, driven by the booming startup ecosystem in India, government support for MSMEs in India, the increasingly easy access to digital investing opportunities, and India on the rise among the world-of India.
A number of SME IPOs have shown very good gains on listing, attracting investment from larger numbers of investors. But it must be borne in mind that the performance of a scheme/ IPO in the past is no guide to its future. Many SME companies also do badly after listing because of lack of financial muscle as well as business issues.
Benefits of Investing in Mainboard IPOs
Mainboard IPOs tend to be less volatile. These companies tend to be larger in scale, have diversified sources of income streams and established management team, and hence considered by investors as relatively less risky.
The higher volume of trading, increases liquidity, so investors are able to trade more quickly in and out. Main board company’s backed by analyst report, so that investors can gain initial knowledge of the company’s situation through the analyst report before investing.
Another benefit is tighter regulation which puts more demands on bigger listed companies, requiring more regulations, disclosures and monitoring by regulators.
Benefits of Investing in SME IPOs
On the SME market, business growth stage will be available early- each expanding at this stage can be examined before they balloon into big business that they are. IPOs on Mainboard can’t provide this.
If small business can grow quickly, enter new markets and boost returns, it may even see its share price ascend over time.
Investing in an SME IPO exposes you to innovative sectors and specialized businesses that are not part of the more generalized, large market indices.
Investors that are prepared to tolerate higher levels of risk might find the long-term gains from SME IPOs will be significant.
Risks Associated with SME IPOs
Almost always the way it works is the higher the return, the higher the risks.
Most SME businesses have shorter trading histories, smaller revenues, narrower customer bases and a greater reliance on a small number of clients-any slowdown in the level of business can have a much greater effect on profitability.
Liquidity is still a big concern. Investors trading SME shares less frequently will find it increasingly difficult to sell during turbulent times.
Different corporate governance standards can also be in place which would also require her to conduct an in depth research prior to investing.
Since these companies are operating on a lower scale they might also face the more intense competition coming from bigger companies in their respective industries.
Risks of Mainboard IPOs
While Mainboard IPOs are regarded as less risky than other IPOs, that doesn’t mean they aren’t without their risks.
If investors widely buy shares at high prices, then IPOs can even more expensive. If investors do obviously speculate IPOs, then investors who buy at expensive price are unlikely to have a good performance.
Market conditions can also impact the success of an IPO. Strong businesses in no way immune from declining their share prices when economies or markets undergo correction.
Hence, it is always advisable for investors to thoroughly analyze the fundamentals of the companies instead of being carried away by the IPO hype.
Which IPO Is Better for Beginners?
When for first time investors, the fact is that Mainboard IPOs are most likely to have better performance than SGX-Catalist IPOs. This is because they require lesser amount of investment, higher market liquidity, more financial information disclosure as well as lower business risk.
A large company can be a good starting point for a novice investor. There is more information available via annual reports, analyst reports, press and earnings presentation ect.
Factors to Consider Before Investing
Whether you go for an SME IPO or a Mainboard IPO, never buy just because the rest of the crowd is applying.
Analyse the business model of the company. Find out how it generates revenues, identify its customer base and assess the future growth prospects of the industry.
Assess financial statements in terms of revenue growth, profitabilities, debt levels, cash flow and return on equity. Compare valuation multiples to those of listed competitors to determine if the IPO price seems reasonable.
Additionally, look at how the company intends to use the proceeds from the IPO. Business raising funds for expansion generally offer better long term prospects than those raising money to pay down debt.
The Future of India’s IPO Market
India’sIPOmarket is still growing as more companies try to raise funds for expansion. Government promotional schemes encouraging new business, rising retail investors, digital investments, and domestic savings are anticipated to further boost IPOs.
IPOs of SMEs will continue to represent a crucial form of funding available to the small business, whereas Main board IPOs will continue to be dominated by institutional investors and global fund.
With the Indian economy growing, both segments are sure to account for a significant part of wealth creation and business growth.
Conclusion
The decision to apply for SME IPO or Mainboard IPO is really depends on your investment portfolio status, risk appetite and experience. Mainboard IPO offers low risk with high level of liquidity, more stable, less volatile, they are preferable for a senior investor and long-term investment. While, the higher risk profile and volatile of SME IPO, it is suitable for an investor who have a high risk appetite.
Good investors, instead of clamouring for listing gains, look for business quality, financial position, trustworthiness of management and growth potential over the longer term. Be it in a small and medium enterprise (“SME”) initial public offering (“IPO”) or in a Mainboard IPO, good research remains your best investment strategy.
FAQs
Is an SME IPO riskier than a Mainboard IPO?
Yes, SME IPOs tend to be on the stock market with smaller quoted company, higher the business risk and less liquidity as well.
Can retail investors apply for SME IPOs?
Yes. Retail investors are eligible to subscribe but the minimum investment amount is normally higher due to bigger lot sizes.
Which IPO offers better long-term returns?
There is no definitive answer. Properly run businesses in either segment are capable of producing great long term results.
Why do SME IPOs often show high listing gains?
A lower issue size, a limited amount of shares available, or an enthusiastic investor appetite can result in higher listing premiums.
Should beginners invest in SME IPOs?
Its better for novice to learn about IPO investment by investing on Mainboard IPOs before even taking a step into the riskier SME IPOs.
