With over 1,200 corporations already listed and greater than 325 migrating to the primary board, Banerjee believes the SME trade may see 10,000 listings over the following decade, unlocking huge 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 growth — 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 numerous motivations. The explanations may vary from both unlocking private liquidity from supply on the market of their shares to public, or potential to borrow towards listed shares, and even higher entry to institutional capital and at last searching for public funds for his or her development story to listing down a couple of.
At the moment, 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 crammed 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 crammed by a couple of people who take a stake on this enterprise as enterprise companions.
Usually these offers are exhausting to rearrange for a corporation and onboarding unknown companions could be create conflicts in enterprise.Itemizing in SME trade is an alternate for companies that are nonetheless rising and wish 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 trade have discovered a extra formal and diversified route to lift cash.
They nonetheless want not less than 50 traders versus 1000 for a typical fundamental board concern – nevertheless 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 various relating to capital hungry smaller corporations which can be formidable and are operating a compliant enterprise.
Other than distributing possession, to being overseen by world class exchanges and SEBI and finally with the ability to do additional capital raises given their monitor file make this an exquisite subsequent step.
Q) You’ve additionally lately launched your personal fund monitoring the SME area – ‘Trilithon Hidden Gems’. Inform us extra concerning the AIF fund and the way do you propose to leverage on MSEM development potential.
A) That is proper, we lately have been authorized by SEBI to launch an AIF Class III the place we need to choose about 10 to 12 corporations out of the present 800 which can be listed amongst others in our portfolio of 30 listed shares on this scheme.
Our analysis has at all times been centered on discovering hidden gems in microcap area and with our AIF we will embody shares which can be microcaps however are listed on BSE and SME Exchanges too. Although a lot riskier than bigger corporations, they’ll supply some excellent alternatives for wealth era.
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 variety, 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 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 provides us confidence that our course of works nicely for microcap inventory screening.
We then typically search for consistency in steadiness sheet parameters. For instance, we deal with tax cost consistency as an indicator for secure enterprise fashions or improve in web 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, steadiness sheet and many others.
The MSME itself is rising in numbers above the GDP price and there are extra corporations which can be growing their capital on the steadiness sheet to increase income.
Nevertheless, now we have solely 1200 listed shares within the SME trade. We expect the SME trade 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 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 traders 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 principle benefit is that since all SME IPO is 100% underwritten, the difficulty received’t fail. By regulation, service provider bankers want to purchase up the entire IPO if there is no such thing as a demand.
So, they’re cautious in scrutinizing the IPO and making certain it’s a sexy enterprise earlier than they bring about it to the market. Additionally, SEBI has now eliminated among 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 fundamental board listed corporations.
Having gone via the scrutiny of a service provider banker, they should discover a market maker. 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 degree.
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 beneath their IPO value, how crucial is inventory choice for traders on this area?
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 usually are not 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 chance of dropping cash could be very excessive – and randomly choosing shares with out correct evaluation would lead to lack of capital not less than 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 traders and fund managers?
A) The principle problem is the liquidity of those shares could 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 available in the market the place good corporations which can be funding worthy are ignored.
For a traditional fund supervisor, these turn out to be non-starter for that reason. Other than this, they’re very dangerous and lots of conservative fund managers may need to see extra mature SME markets earlier than they step in.
Q) Why have retail traders 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 resulting from poor liquidity and small dimension of the businesses. What is just not possible for a fund – may nonetheless work for a person because the demand of liquidity is far decrease when somebody needs 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 typically we see bid-ask spreads as broad as 20%, the place when you purchase a inventory and promote instantly, you’ll instantly lose 20% of your capital.
There aren’t any pointers on bid-ask unfold for market makers as of now, therefore that is a particularly 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 principally people purchased and offered shares. This market is as nascent as that maybe.
Additionally, these shares commerce in tons as a substitute of single shares – which means you must put not less than between 1 and a couple of lakhs to achieve publicity.
This additionally means it is not truly meant for retail traders. As per present classification, HNI is somebody who invests atleast 2 lakhs or extra.
Q) What function do you foresee for institutional traders within the SME market over the following decade?
A) There can 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 can be some humbling tales that may actually come out of this exercise.
Q) Do you count on 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 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, recommendations, views, and opinions given by consultants are their very own. These don’t signify the views of the Financial Occasions)
