SME listings: ETMarkets Smart Talk: From 1,200 to 10,000 | Abhishek Banerjee charts the next decade of SME listings in India

Q) Thanks for taking the time out. The SME platform has seen a sharp rise in listings in the last three years. What’s driving this surge in participation?
A) There are many motivations. The reasons could range from either unlocking personal liquidity from offer for sale of their shares to public, or ability to borrow against listed shares, or even better access to institutional capital and finally seeking public funds for their growth story to list down a few.

Currently, there is a gap between venture funding which typically require extreme scale potential and bank loans that require extreme stability.

Usually, this gap was filled by mid-market funds in a more formal setting or promoters pledging their personal assets to raise money.

There are also instances where this gap is filled by a few individuals who take a stake in this business as business partners.

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Often these deals are hard to arrange for a company and onboarding unknown partners can be create conflicts in business.Listing in SME exchange is an alternative for businesses which are still growing and need capital to execute their roadmap but might not be fit for a typical venture capital fund.This is precisely why many businesses that can get their company listed on SME exchange have found a more formal and diversified route to raise money.

They still need at least 50 investors versus 1000 for a typical main board issue – but it’s found favor with many. Finally, there is the glamor of being seen running a listed company for some is an attraction as well.

SME listing is by far the better alternative when it comes to capital hungry smaller companies that are ambitious and are running a compliant business.

Apart from distributing ownership, to being overseen by world class exchanges and SEBI and eventually being able to do further capital raises given their track record make this a wonderful next step.

Q) You have also recently launched your own fund tracking the SME space – ‘Trilithon Hidden Gems’. Tell us more about the AIF fund and how do you plan to leverage on MSEM growth potential.
A) That’s right, we recently were approved by SEBI to launch an AIF Category III where we want to pick about 10 to 12 companies out of the existing 800 that are listed among others in our portfolio of 30 listed stocks in this scheme.

Our research has always been focused on discovering hidden gems in microcap space and with our AIF we can include stocks that are microcaps but are listed on BSE and SME Exchanges too. Though much riskier than larger companies, they can offer some outstanding opportunities for wealth generation.

Our focus has always been to use our AI engines to score corporate governance standards of listed companies by looking the people on board, pin codes they are present in, gender diversity, professional qualifications of the board members, mapping tax disputes disclosed with known outcomes in case history, overlap of board members with other listed companies we think are of high quality to name a few.

This has served us well where we have generated an annualized return far above the benchmark which gives us confidence that our process works well for microcap stock screening.

We then generally look for consistency in balance sheet parameters. For example, we focus on tax payment consistency as an indicator for stable business models or increase in net worth from retained earnings as examples.

Q) Data suggests that with over 1,200 SMEs listed and 325 having migrated to the main board, how do you view the SME Board as a pipeline for broader market integration?
A) There are about 5 crore MSMEs in India, and looking at their authorized capital, we estimate 5 lakh MSMEs could pass the current requirements for listing like revenue, balance sheet etc.

The MSME itself is growing in numbers above the GDP rate and there are more companies that are increasing their capital on the balance sheet to expand revenue.

However, we have only 1200 listed stocks in the SME exchange. We think the SME exchange could soon outnumber perhaps around 10,000 in the next 10 years – a number that is far above the listed companies of NSE and BSE combined.

Moreover, we think this is another innovation like UPI from India where we can democratize mid-market capital away from private capital to public capital building resilient markets supported by domestic investors who see value in such companies.

Q) In what ways does the SME platform help early-stage companies unlock growth and credibility in public markets?
A) The main advantage is that since all SME IPO is 100% underwritten, the issue won’t fail. By regulation, merchant bankers need to buy up the complete IPO if there is no demand.

So, they are careful in scrutinizing the IPO and ensuring it’s an attractive business before they bring it to the market. Also, SEBI has now removed some of the regulatory arbitrage where SME listed companies had to do semi-annual filings before.

Now it’s quarterly disclosures for both SME and main board listed companies.

Having gone through the scrutiny of a merchant banker, they need to find a market maker. A good market maker will only make markets for companies that they see great potential in.

This creates a second hurdle to separate good from the bad. Finally, the shares are dematerialized which ensure proper KYC of all directors including identification of beneficial ownership to the individual level.

This ensures fit and proper criteria of SEBI is applied to all shareholders pre-listing when they want to access public markets.

Q) With 43% of SME stocks still below their IPO price, how critical is stock selection for investors in this space?
A) Stock selection like all markets is extremely important. However, in this market there can be no passive products as all stocks in the index are not liquid, and hence no one can take full exposure to the index which has generated eye popping 65% CAGR in 5 years – which is actually better than the IRR of many venture capital funds.

Like VC funds, the risk of losing money is very high – and randomly selecting stocks without proper analysis would result in loss of capital at least half of the time. Hence, diversification, research and position sizing are extremely important for someone.

Q) What are the biggest challenges currently facing SME investors and fund managers?
A) The main challenge is the liquidity of these stocks is very low – which means for an experienced fund manager, it makes no sense to include a small allocation to a large fund.

And if the fund is small, the economics of running a fundamentally selected portfolio using analyst coverage does not provide enough scale to launch such a fund. Hence there is a solution gap in the market where good companies that are investment worthy are ignored.

For a classic fund manager, these become non-starter for this reason. Apart from this, they are very risky and many conservative fund managers might want to see more mature SME markets before they step in.

Q) Why have retail investors taken the lead in SME investing, and how is that likely to change going forward?
A) There is currently very little institutional interest in SME markets due to poor liquidity and small size of the companies. What is not feasible for a fund – might still work for an individual as the demand of liquidity is much lower when someone wants to invest in these SME personally from their personal funds and research.

There are about 70 designated market makers in the SME market that guarantee liquidity 70% of the time in the first 3 years of listing – but often we see bid-ask spreads as wide as 20%, where if you buy a stock and sell immediately, you will immediately lose 20% of your capital.

There are no guidelines on bid-ask spread for market makers as of now, hence this is an extremely risky market to venture in. To us it seems how BSE was back in 1990s where there were hardly any managed products except UTI and mostly individuals bought and sold shares. This market is as nascent as that perhaps.

Also, these stocks trade in lots instead of single shares – meaning you need to put at least between 1 and 2 lakhs to gain exposure.

This also means it’s not actually meant for retail investors. As per current classification, HNI is someone who invests atleast 2 lakhs or more.

Q) What role do you foresee for institutional investors in the SME market over the next decade?
A) There will be many more listings so merchant bankers, brokers as market makers and trading platforms as well as exchanges will all benefit from this rising tide.

There is some nibbling by institutions who provide brokered access to this market either in the form of allocations in PMS or using Qualified Institutional Buyer quote in IPO listing to deliver pre-IPO to listing pop when the listing is stellar.

But these are less than handful, and there will be some humbling stories that will certainly come out of this activity.

Q) Do you expect more thematic or passive index products based on SME stocks to emerge in the near future?
A) We don’t see room for a passive product for the foreseeable future in SME as there is very little liquidity. Though liquidity has improved from 50 crores a day in 2012 to about 1000 crores in 2025, the role of any passive product will create unwanted liquidity demand which cannot be met and hence the passive product will have extremely high tracking error or divergence from the index.

(Disclaimer: Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of the Economic Times)