With over 1,200 firms already listed and greater than 325 migrating to the principle board, Banerjee believes the SME trade may see 10,000 listings over the subsequent decade, unlocking large alternatives for capital formation, institutional participation, and wealth creation. From the regulatory framework to the rise of retail curiosity, and the position of data-driven investing, he breaks down what’s fueling this increase — and why SME investing is not only a area of interest play.
Tune in as Banerjee outlines the challenges, the promise of formalized funding for rising companies, and the way his new AIF, ‘Trilithon Hidden Gems’, goals to faucet into essentially the most promising names driving India’s subsequent progress wave. Edited Excerpts –
Q) Thanks for taking the day trip. The SME platform has seen a pointy rise in listings within the final three years. What’s driving this surge in participation?
A) There are lots of motivations. The explanations may vary from both unlocking private liquidity from provide on the market of their shares to public, or capability to borrow in opposition to listed shares, and even higher entry to institutional capital and eventually in search of public funds for his or her progress story to listing down a couple of.
Presently, there’s a hole between enterprise funding which usually require excessive scale potential and financial institution loans that require excessive stability.
Normally, this hole was stuffed by mid-market funds in a extra formal setting or promoters pledging their private belongings to boost cash.
There are additionally cases the place this hole is stuffed by a couple of people who take a stake on this enterprise as enterprise companions.
Usually these offers are arduous to rearrange for a corporation and onboarding unknown companions will be create conflicts in enterprise.Itemizing in SME trade is another for companies that are nonetheless rising and wish capital to execute their roadmap however won’t be match for a typical enterprise capital fund.That is exactly why many companies that may get their firm listed on SME trade have discovered a extra formal and diversified route to boost cash.
They nonetheless want at the very least 50 buyers versus 1000 for a typical principal board problem – however it’s discovered favor with many. Lastly, there may be the glamor of being seen operating a listed firm for some is an attraction as nicely.
SME itemizing is by far the higher different on the subject of capital hungry smaller firms which are bold and are operating a compliant enterprise.
Aside from distributing possession, to being overseen by world class exchanges and SEBI and finally having the ability to do additional capital raises given their observe file make this a beautiful subsequent step.
Q) You’ve additionally lately launched your individual fund monitoring the SME house – ‘Trilithon Hidden Gems’. Inform us extra in regards to the AIF fund and the way do you propose to leverage on MSEM progress potential.
A) That is proper, we lately had been authorised by SEBI to launch an AIF Class III the place we wish to decide about 10 to 12 firms out of the present 800 which are listed amongst others in our portfolio of 30 listed shares on this scheme.
Our analysis has at all times been targeted on discovering hidden gems in microcap house and with our AIF we will embody shares which are microcaps however are listed on BSE and SME Exchanges too. Although a lot riskier than bigger firms, they’ll provide some excellent alternatives for wealth technology.
Our focus has at all times been to make use of our AI engines to attain company governance requirements of listed firms by wanting the folks on board, pin codes they’re current in, gender range, skilled {qualifications} of the board members, mapping tax disputes disclosed with recognized outcomes in case historical past, overlap of board members with different listed firms we expect are of top quality to call a couple of.
This has served us nicely the place now we have generated an annualized return far above the benchmark which supplies us confidence that our course of works nicely for microcap inventory screening.
We then usually search for consistency in stability sheet parameters. For instance, we deal with tax cost consistency as an indicator for steady enterprise fashions or improve in internet value from retained earnings as examples.
Q) Information means that with over 1,200 SMEs listed and 325 having migrated to the principle 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 taking a look at their licensed capital, we estimate 5 lakh MSMEs may cross the present necessities for itemizing like income, stability sheet and so forth.
The MSME itself is rising in numbers above the GDP charge and there are extra firms which are rising their capital on the stability sheet to broaden income.
Nevertheless, now we have solely 1200 listed shares within the SME trade. We predict the SME trade may quickly outnumber maybe round 10,000 within the subsequent 10 years – a quantity that’s far above the listed firms of NSE and BSE mixed.
Furthermore, we expect that is one other innovation like UPI from India the place we will democratize mid-market capital away from non-public capital to public capital constructing resilient markets supported by home buyers who see worth in such firms.
Q) In what methods does the SME platform assist early-stage firms unlock progress and credibility in public markets?
A) The principle benefit is that since all SME IPO is 100% underwritten, the problem gained’t fail. By regulation, service provider bankers want to purchase up the entire IPO if there isn’t a demand.
So, they’re cautious in scrutinizing the IPO and guaranteeing it’s a gorgeous enterprise earlier than they convey it to the market. Additionally, SEBI has now eliminated among the regulatory arbitrage the place SME listed firms needed to do semi-annual filings earlier than.
Now it’s quarterly disclosures for each SME and principal board listed firms.
Having gone by the scrutiny of a service provider banker, they should discover a market maker. A great market maker will solely make markets for firms that they see nice potential in.
This creates a second hurdle to separate good from the unhealthy. Lastly, the shares are dematerialized which guarantee correct KYC of all administrators together with identification of helpful possession to the person stage.
This ensures match and correct standards of SEBI is utilized to all shareholders pre-listing once they wish to entry public markets.
Q) With 43% of SME shares nonetheless under their IPO worth, how crucial is inventory choice for buyers on this house?
A) Inventory choice like all markets is extraordinarily necessary. Nevertheless, on this market there will be no passive merchandise as all shares within the index aren’t liquid, and therefore nobody can take full publicity to the index which has generated eye popping 65% CAGR in 5 years – which is definitely higher than the IRR of many enterprise capital funds.
Like VC funds, the danger of dropping cash may be very excessive – and randomly deciding on shares with out correct evaluation would end in lack of capital at the very least half of the time. Therefore, diversification, analysis and place sizing are extraordinarily necessary for somebody.
Q) What are the largest challenges at present going through SME buyers and fund managers?
A) The principle problem is the liquidity of those shares may be very low – which suggests for an skilled fund supervisor, it is mindless to incorporate a small allocation to a big fund.
And if the fund is small, the economics of operating a essentially chosen portfolio utilizing analyst protection doesn’t present sufficient scale to launch such a fund. Therefore there’s a answer hole out there the place good firms which are funding worthy are ignored.
For a traditional fund supervisor, these turn out to be non-starter because of this. Aside from this, they’re very dangerous and lots of conservative fund managers would possibly wish to see extra mature SME markets earlier than they step in.
Q) Why have retail buyers taken the lead in SME investing, and the way is that more likely to change going ahead?
A) There’s at present little or no institutional curiosity in SME markets because of poor liquidity and small measurement of the businesses. What isn’t possible for a fund – would possibly nonetheless work for a person because the demand of liquidity is way decrease when somebody needs to put money into these SME personally from their private funds and analysis.
There are about 70 designated market makers within the SME market that assure liquidity 70% of the time within the first 3 years of itemizing – however usually we see bid-ask spreads as extensive as 20%, the place for those who purchase a inventory and promote instantly, you’ll instantly lose 20% of your capital.
There are not any tips on bid-ask unfold for market makers as of now, therefore that is an especially dangerous market to enterprise in. To us it appears how BSE was again in Nineteen Nineties the place there have been hardly any managed merchandise besides UTI and largely people purchased and offered shares. This market is as nascent as that maybe.
Additionally, these shares commerce in tons as an alternative of single shares – which means you should put at the very least between 1 and a pair of lakhs to realize publicity.
This additionally means it is not really meant for retail buyers. As per present classification, HNI is somebody who invests atleast 2 lakhs or extra.
Q) What position do you foresee for institutional buyers within the SME market over the subsequent decade?
A) There will likely be many extra listings so service provider bankers, brokers as market makers and buying and selling platforms in addition to exchanges will all profit from this rising tide.
There’s some nibbling by establishments who present brokered entry to this market both within the type of allocations in PMS or utilizing Certified Institutional Purchaser quote in IPO itemizing to ship pre-IPO to itemizing pop when the itemizing is stellar.
However these are lower than handful, and there will likely be some humbling tales that may actually come out of this exercise.
Q) Do you anticipate extra thematic or passive index merchandise primarily based on SME shares to emerge within the close to future?
A) We don’t see room for a passive product for the foreseeable future in SME as there may be little or no liquidity. Although liquidity has improved from 50 crores a day in 2012 to about 1000 crores in 2025, the position of any passive product will create undesirable liquidity demand which can’t be met and therefore the passive product may have extraordinarily excessive monitoring error or divergence from the index.
(Disclaimer: Suggestions, options, views, and opinions given by specialists are their very own. These don’t characterize the views of the Financial Occasions)
