India’s SME IPO space is buzzing with excitement, offering investors the potential for outsized returns in a market where companies have delivered 15x to 20x gains in recent years. According to Manas Chadha, Managing Director & Co-founder of Lighthouse Canton's India business, the SME segment has become a hotbed of activity, “The SME space has seen extraordinary growth, with businesses deeply rooted in the Indian economy and minimal reliance on foreign flows,” said Chadha.
The surge in SME IPOs comes as regulators have created a dedicated exchange for smaller companies, easing access to public markets. While the framework for SME listings has existed for over a decade, this exchange was launched around four years ago to give SMEs an alternative funding route amid the drying up of pre-IPO private funding during COVID. “SEBI doesn’t directly intervene here; the exchange approves offer documents, providing flexibility to promote the startup culture,” explained Chadha.
Unlike larger firms, SMEs are often built on strong fundamentals, with promoters possessing deep domain expertise. However, their financial fundamentals can sometimes be weaker than those of larger, established firms, making them more susceptible to external shocks. Despite this, “Investors recognise this potential, leading to staggering oversubscriptions in many SME IPOs,” Chadha noted. The demand for SME IPOs has been immense, with some issues being oversubscribed by 100 to 200 times. It would be valuable to examine data to understand whether this trend reflects sustained confidence in SMEs' fundamentals or is driven by other market dynamics.
Differences Between Main Board and SME Exchange
Opportunities in Mid- and Small-Cap Space
Chadha also highlighted the broader opportunities in mid- and small-cap investments. “Large-cap stocks are often driven by demand and supply dynamics. If there’s selling pressure, even the best-performing stock can’t be protected, as it’s largely dependent on market forces. However, mid- and small-cap counters often show extraordinary growth, with minimal reliance on foreign flows. These businesses are typically very localized or deeply rooted in the Indian economy, making them attractive to investors,” he explained.
Investors are on the lookout for multi-baggers.
“Investors are more interested in finding the next Amazon early in its growth journey, where they can capture the full revenue potential. This is the current flavour of investments in the SME space,” said Chadha.
He further elaborated on the investment mindset: “If I want to invest in a company like Apple today, I can. But if I find a similar company at an earlier stage—say, in a niche space—and its growth trajectory mirrors Apple’s early days, I can map its potential. If I can invest at a valuation that’s 100x lower, it becomes a compelling opportunity.”
The key, according to Chadha, is execution as it's important to note that SME investments also carry inherent risks. Their localised nature and smaller scale can make them more vulnerable to external shocks, such as demand fluctuations, rising competition, or changes in funding costs, which investors need to carefully assess.
“The ability to execute a vision determines long-term success, whether it’s a large-cap or a small-cap company. Over the last 20 years, only a handful of companies have truly succeeded at their early stages. It all comes down to execution.”
Risks and Regulatory Tightening
With the explosive growth in SME IPOs, concerns around transparency and valuations have prompted SEBI to propose stricter norms to protect investors. The regulatory body is considering enhanced disclosure requirements and tighter due diligence standards to curb risks associated with excessive speculation.
“Regulators are wary of the massive oversubscriptions and high valuations that extract thousands of crores from the market,” said Chadha. SEBI is also addressing concerns over limited institutional oversight, as many SME trades occur in large lots. “SME trading often lacks detailed scrutiny, and this is something SEBI is looking to improve,” he added.
Beyond oversight challenges, the SME space carries additional risks, including lower liquidity, heightened volatility, and the potential for price manipulation. Many SMEs also face operational and financial vulnerabilities, such as dependence on a limited customer base, higher sensitivity to economic downturns, and difficulties in securing stable funding. These factors can amplify risks for investors, making due diligence and regulatory intervention even more critical.
One key reason institutional investors, such as mutual funds, often avoid SME IPOs is the reputational risk associated with smaller firms. “If a promoter is accused of wrongdoing, even over ₹10-₹20 crore, it can significantly impact the company’s market cap,” Chadha explained. “The fear of negative publicity is a significant factor. Investors are cautious about being in the limelight.”
SEBI’s proposed tightening of SME IPO norms includes requiring investment bankers to hold a larger portion of the issue and strengthening due diligence requirements.
Additionally, SEBI is considering making it mandatory for SME IPOs to have larger post-issue paid-up capital to ensure stability. “This is a necessary step for sustainable market growth, especially given the rapid pace of capital flow into SME IPOs,” Chadha added.
Despite regulatory concerns, the SME space remains highly attractive to ultra-high-net-worth individuals (UHNWIs) and family offices. “Prominent UHNWIs actively participate in SME IPOs,” said Chadha.
Several reasons seem to be driving this trend including opportunities for diversification, active involvement, alignment with entrepreneurial values of the investors,and favorable market conditions.
For example, investing in SME IPOs provides UHNWIs and family offices with opportunities to diversify their portfolios by accessing high-growth sectors that are often underrepresented in the main board public market. SMEs at times operate in niche markets with significant expansion potential, offering investors the chance to capitalise on early-stage growth. UHNWIs and family offices also often prefer investments where they can actively engage and leverage their expertise.Many UHNWIs also resonate with the entrepreneurial spirit of SMEs, recognising parallels with their own paths to success.
Lighthouse Canton Capturing the SME Opportunity
Lighthouse Canton is optimistic on the growth of India’s SME space, aiming to identify high-growth companies at attractive valuations. “Our core thesis is to find companies with high Return on Equity (ROE) at the lowest possible multiples,” said Chadha. The firm evaluates SME companies meticulously, ensuring that entry valuations remain highly compelling. Additionally, higher weightage is given to companies that are asset light.
Liquidity is another critical factor in SME investing.
“In the mainboard market, liquidity is much better, which is a significant advantage. When I evaluate an SME, I aim to get the company at a valuation that feels deeply discounted. Of course, in reality, a good company with strong promoters will always come at a cost.”
However, Chadha noted that as SME companies grow and become more profitable, they eventually transition out of the SME category due to SEBI’s requirement that IPO issuers offer at least 25% of their shares to the public. “This adds another layer of complexity and makes it important for investors to assess the long-term potential of these companies.” The firm focuses on small-cap companies with market sizes starting from ₹500 crore, a range that covers most SMEs and even some unlisted players.
“With the SME market gaining traction, Lighthouse Canton’s goal is to build a compelling narrative around this market and be the trusted experts who have done the groundwork,” said Chadha.
Chadha concluded with a pragmatic outlook: “The SME space allows you to capture extraordinary growth, but you must be selective. If you capture the right opportunities, the rewards can be significant.”
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