With over 1,200 corporations already listed and greater than 325 migrating to the primary board, Banerjee believes the SME alternate may see 10,000 listings over the following decade, unlocking large alternatives for capital formation, institutional participation, and wealth creation. From the regulatory framework to the rise of retail curiosity, and the function 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 probably the most promising names driving India’s subsequent development wave. Edited Excerpts –
Q) Thanks for taking the day out. 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 a lot of motivations. The explanations may vary from both unlocking private liquidity from provide on the market of their shares to public, or means to borrow towards listed shares, and even higher entry to institutional capital and at last looking for public funds for his or her development story to listing down a couple of.
Presently, there’s a hole between enterprise funding which generally 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 lift 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 onerous to rearrange for an organization and onboarding unknown companions could be create conflicts in enterprise.Itemizing in SME alternate is another for companies that are nonetheless rising and want capital to execute their roadmap however may not be match for a typical enterprise capital fund.That is exactly why many companies that may get their firm listed on SME alternate have discovered a extra formal and diversified route to lift cash.
They nonetheless want at the very least 50 buyers versus 1000 for a typical foremost board challenge – nevertheless it’s discovered favor with many. Lastly, there’s the glamor of being seen working a listed firm for some is an attraction as effectively.
SME itemizing is by far the higher various in terms of capital hungry smaller corporations which might be bold and are working a compliant enterprise.
Other than distributing possession, to being overseen by world class exchanges and SEBI and finally having the ability to do additional capital raises given their observe document make this an exquisite subsequent step.
Q) You may have additionally just 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 intend to leverage on MSEM development potential.
A) That is proper, we just lately had been authorized by SEBI to launch an AIF Class III the place we need to choose about 10 to 12 corporations out of the prevailing 800 which might be 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 might be microcaps however are listed on BSE and SME Exchanges too. Although a lot riskier than bigger corporations, 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 corporations by wanting the individuals on board, pin codes they’re current in, gender range, skilled {qualifications} of the board members, mapping tax disputes disclosed with identified outcomes in case historical past, overlap of board members with different listed corporations we predict are of top quality to call a couple of.
This has served us effectively the place we have now generated an annualized return far above the benchmark which supplies us confidence that our course of works effectively for microcap inventory screening.
We then usually search for consistency in stability sheet parameters. For instance, we deal with tax fee consistency as an indicator for steady enterprise fashions or improve in internet price from retained earnings as examples.
Q) Knowledge means that with over 1,200 SMEs listed and 325 having migrated to the primary 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 their approved capital, we estimate 5 lakh MSMEs may move the present necessities for itemizing like income, stability sheet and many others.
The MSME itself is rising in numbers above the GDP fee and there are extra corporations which might be growing their capital on the stability sheet to increase income.
Nevertheless, we have now solely 1200 listed shares within the SME alternate. We expect the SME alternate may quickly outnumber maybe round 10,000 within the subsequent 10 years – a quantity that’s far above the listed corporations of NSE and BSE mixed.
Furthermore, we predict that is one other innovation like UPI from India the place we will democratize mid-market capital away from personal capital to public capital constructing resilient markets supported by home buyers who see worth in such corporations.
Q) In what methods does the SME platform assist early-stage corporations unlock development and credibility in public markets?
A) The primary 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 whole IPO if there isn’t a demand.
So, they’re cautious in scrutinizing the IPO and making certain it’s a sexy enterprise earlier than they create it to the market. Additionally, SEBI has now eliminated a few of the regulatory arbitrage the place SME listed corporations needed to do semi-annual filings earlier than.
Now it’s quarterly disclosures for each SME and foremost board listed corporations.
Having gone by way of the scrutiny of a service provider banker, they should discover a market maker. An excellent market maker will solely make markets for corporations that they see nice potential in.
This creates a second hurdle to separate good from the dangerous. Lastly, the shares are dematerialized which guarantee correct KYC of all administrators together with identification of useful possession to the person stage.
This ensures match and correct standards of SEBI is utilized to all shareholders pre-listing once they need to entry public markets.
Q) With 43% of SME shares nonetheless under their IPO value, how vital is inventory choice for buyers on this house?
A) Inventory choice like all markets is extraordinarily necessary. Nevertheless, on this market there could be no passive merchandise as all shares within the index will not be 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 could 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 most important challenges at present dealing with SME buyers and fund managers?
A) The primary problem is the liquidity of those shares could be very low – which implies for an skilled fund supervisor, it is not sensible to incorporate a small allocation to a big fund.
And if the fund is small, the economics of working a basically 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 corporations which might be funding worthy are ignored.
For a basic fund supervisor, these grow to be non-starter because of this. Other than this, they’re very dangerous and plenty of conservative fund managers would possibly need 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 may be at present little or no institutional curiosity in SME markets as a consequence of poor liquidity and small dimension of the businesses. What shouldn’t be possible for a fund – would possibly nonetheless work for a person because the demand of liquidity is far decrease when somebody desires to spend money on 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 huge as 20%, the place in case you 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 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 heaps as an alternative of single shares – that means it’s essential to put at the very least between 1 and a pair of lakhs to achieve publicity.
This additionally means it is not truly meant for retail buyers. As per present classification, HNI is somebody who invests atleast 2 lakhs or extra.
Q) What function do you foresee for institutional buyers within the SME market over the following decade?
A) There will probably 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 may be 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 probably be some humbling tales that may definitely come out of this exercise.
Q) Do you anticipate extra thematic or passive index merchandise based mostly 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’s little or no liquidity. Although liquidity has improved from 50 crores a day in 2012 to about 1000 crores in 2025, the function 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, ideas, views, and opinions given by specialists are their very own. These don’t characterize the views of the Financial Instances)
