Forget Sensex@60K, this index has given 70x returns in last 9 years
Most importantly this is a 100% underwritten transaction where the merchant banker must underwrite at least 15% on their own account. This useful to align interests
By Abhishek Banerjee
Do you know of an index in India that has given 70x returns in last 9 years? How about an index that returned 5x since April 2021?
Let’s venture into the hidden world of SME IPO. The S&P BSE SME IPO Index which started with a base value of 100 increased to 7052 with a 70x return in 9 years.
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Department of industrial policy and promotion (DIPP) recognized startups are exempt from few of the listing regulations making this an interesting venue for startups to raise capital instead of private capital from angel investing network or VC funds.
Almost 11 years ago, market regulator, SEBI, laid the foundation for SME trading platform. SMEs represent more than 95% of enterprises and 60-70% of the jobs as per OECD.
Internationally there are SME Exchanges like AIM (London), Canada (TSXV), Hong Kong (GEM), Japan (Mothers), Korea (KOSDAQ) and US (NASDAQ).
In India, SME exchange has recently been seeing some activity in the slew of IPOs we saw. Let’s take a deeper dive at this new and exciting market segment.
Indian SME segment has received interest from agro-based industry, manufacturing, textiles, IT, construction industries to name a few.
One of the first companies to list on SME exchange was BCB finance in 2012 which is now called Pyxis Finvest Ltd. Our research shows that companies that are listed on BSE main board that were previously listed on the SME board outperform the firms that list directly on the main board as they have lower volatility of returns.
Some of the reasons for lower volatility could be that in the SME exchange, each scrip can have maximum of 5 market makers, and the market makers or brokers as must guarantee a minimum depth of 1 lakhs.
There must be distributable profit in 2 out of the last 3 preceding years with a minimum net worth requirement. The promoters are locked in for 3 years.
Most importantly this is a 100% underwritten transaction where the merchant banker must underwrite at least 15% on their own account. This useful to align interests.
A minimum of 50 investors are required at the IPO stage. There must be a stockbroker registered with SME segment as a market maker that must provide guaranteed liquidity for the market participants. A registered broker with the main exchange can do this without additional registrations.
SME stocks are not like other listed stocks especially penny stocks. There are predetermined lot sizes for SME trading. This makes it less susceptible to price slippages normally seen in penny stocks.
These are niche businesses who are looking to raise less than Rs 25 cr in paid up capital. On BSE alone there are close to 450 such companies that have been listed over the last 9 years.
We aim to take advantage of this growth by researching the space of micro-cap companies using our proprietary database of listed microcap companies.
Our listed VC smallcase tries to find listed companies that are expected to generate VC like returns from micro-cap listed on Indian exchanges.
We think this is an interesting space for discovering niche business with exciting yet sustainable business models.
(The author is CEO Lotusdew)
(Disclaimer: The views/suggestions/advices expressed here in this article are solely by investment experts. Zee Business suggests its readers to consult with their investment advisers before making any financial decision.)
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