SME IPOs (Small and Medium Enterprises Initial Public Offerings) often appear costly for a few reasons, especially when compared to mainboard IPOs.
Here are some reasons why:
1. Higher Issue Expenses (Proportionally)
- Fixed Costs like legal fees, merchant bankers, auditors, registrars, marketing, etc., remain the same whether it's a ₹10 crore IPO or ₹1,000 crore IPO.
- For SMEs, since the issue size is small, these costs eat up a more significant chunk of the capital raised.
2. Merchant Banker Fees
- SME IPOs rely heavily on merchant bankers (lead managers) for handholding through the process.
- These bankers charge relatively higher fees as a % of issue size—sometimes 5–10%, whereas for large IPOs, it could be under 1%.
3. Low Liquidity & Risk Premium
- SME stocks are perceived as riskier and less liquid, so they often have to price their shares attractively, with higher margins.
- Additionally, investors expect higher returns for the added risk, which impacts pricing strategy and the cost-benefit balance.
4. High Marketing/IPO Management Costs
- To attract investors, SMEs have to invest more in roadshows, investor meets, advertising, and promotional campaigns, because they are not as well-known as big companies.
5. Underwriting Costs
- SME IPOS are often fully underwritten, which adds to the cost. The underwriters guarantee the sale of shares, but in return, charge a higher fee for the risk they take.
6. Regulatory and Compliance Burden
- Even though SME platforms (such as NSE Emerge and BSE SME) have relaxed norms compared to the main board, companies still need to undergo audits, filings, and disclosures, which add to the cost.
