Listed SMEs perform better than unlisted ones, says RBI study

17 Aug 2022 , 11:55 AM

Recently, as many prices of IPOs of larger firms have crashed on listing day, an RBI study finds that SME IPOs preceded by a boom market period are more underpriced making a case for more equity funding for SMEs though it might be worth investing in small and medium (SME) enterprises rather than lending to them. 

Moreover, firms listed in SME exchanges have higher profitability, liquidity and asset utilization ratio as compared with other unlisted SMEs.

Contrary to the common perception, it has been observed that the extent of underpricing in both the SME exchanges is lower when compared to the respective main boards and over time the extent of underpricing has decreased in SME platforms.

Since its inception in the year 2012, an increasing number of SMEs got listed each year in BSE SME exchange till the year 2017-2018. However, the trend shown reversed results after that with the number of SME IPOs drop down from 62 in 2017-18 to only 11 in 2020-21 (till January 2021). The same trend is realized in NSE emerge, where the number of IPOs registered a sharp jump from 8 in 2015-16 to 92 in 2017-18 and has fallen thereafter. The study notes that there was some recovery in Q4FY21.

The RBI study concludes that though retail investors’ participation facilitates aftermarket liquidity of SME IPOs, from a policy perspective, there is a requirement of broadening the investor base to suit the risk-return combination which are offered by these alternate investment markets. 

And at the same time, protecting retail investors’ interest remains important. The study by RBI economist, Shromona Ganguly of department of Economic policy research analyzed that the initial public offering (IPO) data of both BSE’s and NSE’s SME dedicated exchanges which have more relaxations than the main board. The views however do not reflect RBI’s views, as per the report on “Economic Times”.

However, in recent years, the two SME exchanges have seen a substantial rise in the number of initial public offering (IPOs), cross-country comparison reveals that the ratio of SME market capitalization to main market capitalization remains low in India (around 0.07 per cent) as compared with some other developing economies like Korea (10.96%), Turkey (0.16%), South Africa (0.21%), Egypt (0.33%) and Malaysia (0.75%), the paper noted.