The rise in Small and Medium Enterprise (SME) Initial Public Offerings (IPOs) has marked a significant trend in India’s capital markets in recent years. With the Securities and Exchange Board of India (SEBI) implementing reforms to enhance transparency and compliance, SMEs and investors are evaluating the impact on the IPO landscape. Tarun Singh, Founder and Managing Director of Highbrow Securities, offers insights on these developments, covering their effects on the SME ecosystem, the growing role of fintech in compliance, and shifting investor sentiment.
Q.1) Given SEBI’s recent regulatory reforms, how do you see these new DRHP approval regulations impacting the landscape for SME IPOs, and what specific benefits or challenges do they present for investors?
Regulations have always emerged from a perceived necessity, and they are rarely reformed proactively. Therefore, the recent regulatory reforms concerning listing approval for SME IPOs have only come after a significant need was recognized, driven by the unprecedented demand from both investors and issuers. There are no specific challenges for investors, as these reforms aim to ensure high-quality issues and fair play, offering protection from unwarranted losses. However, for issuer companies, the shift in eligibility criteria will influence how they approach the market. Consequently, while the number of issues may decrease, the value of those issues is likely to increase, signalling the end of an era for micro-sized SME IPOs.
Q.2) With SEBI’s strong focus on market transparency, how has this commitment influenced investor confidence, and how does it play into Highbrow’s approach to preparing SMEs for successful IPOs?
Transparency is fundamental for the collective growth of all stakeholders in any industry. At Highbrow, we consistently emphasize to promoters of issuer companies the vital connection between shareholder trust and corporate growth. We often draw parallels between customers and future shareholders; just as customers have been crucial, so too will shareholders be. Offering ample opportunity for future shareholders is a key principle in our guidance to promoters. While compliance with disclosure norms is essential, providing significant prospects for future investors represents the highest level of transparency a promoter can achieve when launching an IPO. Ultimately, IPOs are not merely avenues for capital raising; they are perhaps the only means to leaving a long-lasting impression leading to follow on offers.
Q.3) Looking to the future of SME regulations in India, what key frameworks do you anticipate could open up greater funding avenues for SMEs, while ensuring robust investor protections?
Pre-IPO investments in SMEs preparing for exchange-bound IPOs present a major opportunity yet remain significantly untapped by investors and promoters. This requires collective awareness from both market participants and regulators. I anticipate that, as part of ensuring good corporate governance and robust eligibility for listing, a pre-IPO investment/Investor will become an important eligibility factor. Currently, the regulations surrounding this class of investment are somewhat impractical for investors. I foresee the future favouring Qualified Institutional Buyers (QIB) investments in this space, leading to successful public listings.
Q.4) The role of fintech in regulatory compliance is growing rapidly. How do you foresee fintech innovations transforming the compliance process for SMEs, and what should SMEs prioritize in adopting these tools?
In recent years, we've witnessed groundbreaking advancements and sustainable progress in the applications of financial technologies, both within and outside of banking contexts. Compliance has traditionally been a challenge for IPO-bound small businesses, both in mindset and practice. As regulations and guidelines increase, so too do the chances of non-compliance. Consequently, both regulators and businesses are increasingly adopting fintech tools to minimize oversights and automate compliance processes efficiently. However, this reliance on fintech tools elevates the standards of governance due to their ease of use.
In the future, we can expect the following inventions and improvements: online submission, instant acceptance or rejection of prospectuses by SEBI, SEBI's prompt preliminary observations, immediate refunds to investors, and, notably, cost-effectiveness. These are crucial contributions from fintech. Fintech reduces the need for extensive resources dedicated to compliance, thereby lowering overhead costs—a significant advantage for SMEs pursuing an IPO.
While selecting a fintech tool, SMEs should prioritize; Data Security and Privacy- During an IPO, scrutiny over data handling and protection is intense. It's vital to select fintech tools with robust security features to safeguard sensitive data. Integration Capabilities- Ensure that fintech solutions seamlessly integrate with existing business systems to avoid disruptions during the IPO preparation process.
Q.5) As an investor, what core criteria do you emphasize when selecting SMEs with high growth potential? How important are aspects like corporate governance and business scalability in your investment decisions?
I prioritise the company's and management's readiness to adopt higher standards of corporate governance and future scalability. However, I'm also keenly interested in understanding exactly where the desired capital will be allocated and its overall impact on the promised scale. For me, an Offer for Sale (OFS) often serves as a red flag, especially in small company IPOs. I believe every penny raised should be used effectively to ensure value cultivation. This brings me to the second most significant aspect of selecting one issue over another: the promoter's vision in cultivating versus harvesting value. I'm inclined to support continued cultivation by agreeing not to pursue overvaluation, thereby ensuring shareholders consistently feel like winners.
Q.6) Angel investors and venture capitalists are increasingly active in the SME ecosystem. How would you describe their role in shaping SME growth today, and what impact does this have on the IPO landscape?
Currently, they play a somewhat limited role in this particular market. However, they are poised to become significant contributors to the next chapter in SME IPO listings. If their involvement is guided by a strong awareness of maintaining the ecosystem's values, they will nurture both the markets and enhance investor sentiments. This development will positively impact Indian capital markets, potentially making it the most favourable primary market in the world.
Q.7) Considering the inherent risks of SME investments, what strategies do you recommend to investors to manage volatility and ensure sustainable returns, particularly in small-cap IPOs?
The primary risk specific to SME IPO investments lies in the lot size and its trading. In a fairly liquid market, everything may appear enticing. However, as liquidity decreases, the challenges of trading in larger lots can affect demand. Therefore, I advise traders who are applying for an IPO to first identify their exit strategies before entering. Conversely, if you're a believer and a true investor, enter only when you fully understand what you are getting into and refrain from seeking an immediate exit.
Q.8) Highbrow Securities has been instrumental in leading many companies to IPO success. Could you share some insights into the key factors that contribute to successful IPO transitions, and how your firm’s approach has evolved with the changing regulatory environment?
A successful IPO transition hinges on two key factors: the promoter's conviction and clarity about their business, and the investor's conviction and clarity about the business. At the end of the day, tradable shares ensure exits to balance profits and losses, but it's the courage to tackle risks head-on that truly matters.
Value is crucial as it lays the foundation for future shareholders’ long-term commitment to the company. Satisfied shareholders are likely to participate in future issues, ensuring the promoter’s and business’ success. A prime example is Dhirubhai Ambani’s IPO debut, which was highly shareholder-centric and remains favoured by investors today.
Our approach has remained consistent despite regulatory changes because we've always prioritized a long-term perspective. In fact, regulatory adjustments have simplified our work by aligning promoters with the vision of using IPOs as springboards for future growth rather than just short-term gains. This philosophy remains relevant for both SME and Mainboard issues.
