The SME IPO boom needs to last for the sake of future billionaires

The 161 businesses which are listed in the SME segment of Indian stock exchanges allocated nearly 94 per cent of the money raised to meet company requirements

Sam Walton used a $25,000 loan from his father-in-law to open his first store. The venture grew into the retail giant Walmart and made him the richest man in America.

Small businesses in India have traditionally relied on similar informal sources of funds to start and sustain their ventures. This year may have marked a turnaround, with hundreds of them raising a record amount from the stock market. Unlike larger companies, which also tap the stock market for funds, most of the capital raised by small businesses has been ploughed back.

The 161 businesses which listed in the small and medium enterprises (SME) segment of Indian stock exchanges allocated nearly 94 per cent of the money raised to meet company requirements, show numbers from Prime Database. The corresponding figure for the 46 large companies that also sold shares to the public for the first time through initial public offering (IPOs) in 2023 was around 42 per cent. The rest of the money raised went to existing shareholders who exited the company partially or fully. On average, over 90 per cent of the capital raised by SMEs has gone to meet company requirements since 2012 (chart 1).

Studies have shown that small businesses in India are starved for capital. Only 2.4 per cent of their equity demand was met in 2017, according to a 2018 study by the International Finance Corporation. The SME segment on stock markets raised Rs 4,090.5 crore this year (as of November), the highest since 2012. Around Rs 3,829 crore of this was fresh capital which went to companies instead of exiting shareholders — also the highest on record.

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The surge in the amount raised through the stock market is still only a fraction of the funding that small businesses get from elsewhere (chart 2).

The funding of small businesses has implications for India’s manufacturing push. In 2021-22, micro, small and medium enterprises (MSMEs) contributed 29.2 per cent to India’s gross domestic product (GDP) and 40.8 per cent to manufacturing. Services companies have almost none of the recurring spends on machinery and other requirements of manufacturers, according to the IFC report. Manufacturing companies have higher recurring expenditure. They were estimated to account for nearly 75 per cent of the overall need for equity capital among MSMEs (chart 3).

The SME IPO boom will have to last a long while yet, if only to ensure that India’s future billionaires can turn to the stock market for funds with the same ease as they turn to their relatives.