In this episode of SmallCap Spotlight, we dive into the world of SMEs tapping into the capital markets. Joining us is Sunil Shah, Group CEO & Director, Khambatta Securities, discussing how companies are navigating their listings and the growth opportunities that capital markets provide.
Mubina Kapasi: Hello and welcome to Smallcap Spotlight. I’m Mubina Kapasi. For the last couple of years, we’ve seen that small and mid-cap companies have wanted to tap into the primary markets and nest themselves.
In fact, you’ll find the interviews of the managers of some of these companies right here on our YouTube channel. But today, we’ll be interacting with the entities behind the successful listing of these companies, the investment bankers or the merchant bankers. And we are going to be interacting with a company that is 100 years old and has a record of having its companies listed with positive gains every single time on listing day.
I have with me Sunil Shah, Group CEO and Director of Khambatta Securities. Mr. Shah, thank you so much for giving us your time today. My first question is that, like I said, a lot of companies have wanted to hit the primary markets, nest themselves.
You have so many years of experience interacting with companies, interacting with these SMEs. What do you think is the reason behind this?
Sunil Shah: First of all, madam, thank you very much for having me on this show. Great pleasure. And yes, to answer your question, you see, when an entrepreneur starts a business, it could be a bootstrap or, you know, borrows money from their relatives and family money and he starts a business. And generally, we see a businessman has fired his money. He’s passionate about his business.
So he does well and he keeps growing. But there comes a time when he needs more capital. So he borrows some more money.
And then again he borrows, but then comes a time where growth capital is much needed. And this growth capital cannot be borrowed anymore because the balance sheets will be out of shape. So there are a few options for entrepreneurs.
He can go, these days, we have VCs and private equity players. He can, an entrepreneur can go to them. But, you know, those funding comes with strings attached.
And these entrepreneurs are very touchy and very passionate about their business. So they don’t want any interference. They don’t want people to, you know, take concurrence from others, you know, to do anything.
Because he thinks he knows his business the best. And he knows how to grow this business. So the option, the only option, is coming to the capital markets.
Now, previously, when there were no SME platforms available, most of the people could not make it to the capital market unless they achieved that sort of a size. Now, what has happened, that with this fabulous idea of, you know, both the private exchanges of the country, and then national stock exchange and bond sheets, they come out with this SME platform to facilitate this kind of need for other players. So that is one thing that they had.
Second thing, not only this enabled the entrepreneur to grow, but in the process, he creates wealth for himself and the company. Previously, he would create wealth only for himself and the company. Now, see, after coming to the market, he’s creating wealth for himself and he can continue to do that.
Then he creates wealth for the investors. And because he’s growing, he creates wealth for every stakeholder. A rural society in the nation has been figured out.
So people and entrepreneurs in general have understood the importance of coming to equity markets, capital markets, raising funds, and being governed by the laws and compliance of the capital markets, which is, of course, again, beneficial to the promoters of the companies. I think these are the few things which is why we’re seeing this empower to come to the capital markets.
Mubina Kapasi: I think the one thing that you mentioned, that now even investors have understood the importance of making money via the capital markets, and they have the capital as well to put into these companies.
Sunil Shah: Very true! If you, you know, mine the data, say 20, 30 years back, the equity curve was restricted to a few companies and a few cities. Now things have changed.
What is happening is people have understood the importance of financial products and financial assets. So in a sense, previously, we would have real estate and gold. They are still, I mean, financial products that wouldn’t be restricted to bio-deposits.
Last 20 years, we’ve seen a huge change. The new generation understands that if they want to create wealth, beat inflation, and beat lifestyle inflation, they need to invest in equity. And that is the reason that equity is taking off.
I mean, the numbers are just having, you know, the post during the COVID, how many new Demat accounts, how many new mutual fund portfolios were created. And if you see the SIP numbers, every year it’s getting, every month it is getting new high. So yes, we are on that growth trajectory.
So we are, but still, we are still, you know, at a very nascent stage, I would say, compared to the global standards and developed nations and developed markets. And compared to our own population as well, right? Yes, if I’m correct, I mean, through some numbers, and I think that I’m quite close to accurate. We have some 4 or 5 crore retail investors, and around 12 crore developers.
Now, out of another 40 to 50 crores, I mean, there is a way forward. I mean, way to go. I think there was an app which, you know, game apps or something there, I’m the world’s biggest subscriber, then we took a breath. So way more, I’m certainly very, very positive and optimistic that this is going to take off.
Mubina Kapasi: Well, I want to bring the focus back now to SME companies. There’s a very interesting statistic I read about Khambatta securities on a website, that all of the companies that you worked with have seen positive behaviors on listing day. Could you share the secret sauce behind this?
Sunil Shah: Let me clarify that we are very, very, you know, careful when it comes to selecting a company for IPO. There are three key factors which we pay attention to. There are many, but three key, I would say, was the positive of that.
What is the nature of business? The business should be such that it has a huge potential to go further. The second is management. Whether management is interested in the business, they want to grow, they have this passion for this business.
So that’s second. And the third most important thing is value edge. The right valuation.
Not only for the management, but also for the investors. The first step, IT investors. And that’s the reason we are always bringing something on the table for the investor.
So, by the grace of God, this Helya Coursera listing at a premium, having what is known as listing gains, has been successful.
Mubina Kapasi: Now, you have obviously worked with a lot of companies, especially SME companies. In your experience, what are the challenges that these SMEs face when they want to list themselves? Naturally, as unlisted players, the house may not necessarily be very much in order because these entrepreneurs are busy still growing their business. But if you have to start taking money from the public, then there are certain systems and processes that have to be in place. So, what are the challenges that these SMEs encounter and face when they have to list themselves?
Sunil Shah: I think, see, there’s a spreader phase. Before going for the wedding ceremony, the bride used to be decked out. So, here, it’s like this, that they’re small, it’s not that they’re not aware of so many things. So, first, we have to work hard to make them ready for the islanders. So, the challenge is, whatever you have mentioned, is before we make them ready for an ideal, like, you know, do this correctly, do this correctly, stimulating this, do that.
And it is not that inadvertently they must have done something, you know, like, which is not in line with when we want to come with that. So, basically, making the IPO ready is really time consuming and little challenge. Once they are ready, the infrastructure is so good that post they are ready and we are ready, everything is ready. So, the thing is, before they are ready, there’s a lot of work going behind it.
Mubina Kapasi: Have you ever felt that a company has listed itself too early or did they already tell you the signs that this company, you know, should not tap the markets because they’re not prepared, you know, operationally, financially, or in any other way?
Sunil Shah: Of course, we don’t take that. We tell them. We tell them, look, this is not the right time. You’re not ready for this. If you kind of, just for the sake of, you know, listing, maybe you will get listed.
We will not do this. You will get listed. But post listing, what will happen? And then once, you know, your brand was tarnished, I’m using a very strong word, but, you know, once it is tarnished, then it’s very difficult to attract investors back, especially after listing in the secondary market.
So, we tell them, we guide them. We tell them, look, you need to do a few things, you know, put it together, and we are not yet ready. The numbers are not all that good.
This is not an attractive proposition. That is all we get. So, yes, there are cases.
Now, as you know, that there is a camera, and people, we do get many, many proposals, and then we are being careful, as I told you earlier, selecting the right candidate.
Mubina Kapasi: Let’s talk about what happens after the listing, because in your words, as you said, you’ve prepped the bride, but now post listing, there are obviously a lot of compliances, etc., that these companies now have to adhere to. Do you think these companies find it challenging, or do you think they’re able to cope?
Sunil Shah: Most of them have done well. They’re still commodity premiums. They’ve done and they’ve created wealth, because technically, I feel, it’s merchant bankers who are one, we come and get the system. They extended the hands of investors, the secondary market, and it all, there was only one thing, numbers, numbers, numbers.
You give better numbers, you keep attracting new investors, your company prices, mean valuations will keep going up, and the company’s market cap will keep going. So, post listing, but we take care, and I mean, we are always there. You know, that sometimes what happens is, we don’t know, there are still some issues for big time pay, the things like that.
So, because they got listed, they achieved what they were to do with this IPO funds, and after achieving that kind of goal, to expand further and go from the next year to the next year one, they’ve been talking about some capital. So, that time we are always.
Mubina Kapasi: How do you see a change in morale, you know, in the management of the employees post listings?
Sunil Shah: I tell you something, most of, or rather, I didn’t tell all of our promoters, that they are still hungry for the business, and it’s not like that, okay, I got my money, bye-bye, I don’t care what happens to my share. No, I think that mindset is changing overall. I mean, if you see in the market, we’ve seen that things are changing, people have understood, it’s no longer what used to happen, but you know, when certain promoters were like, even premium or, you know, higher price because of their NTPD and their corporate governance and other things. Now, I think the corporate governance issue is understood and accepted by almost all the companies which are listed and which are coming now for listing.
I think that’s very good news for the reactors. We have evolved and we are evolving continuously, and I think we’ve got a very brilliant agency and regulatory framework which takes care of, we are improving compliance so that they don’t look at how much transparency. A company wants to make some analysis, they have to announce that.
I mean, today, I honestly feel rather, and we current younger generation investors, they’ve got all the data to the tip of the mouse, which was not there in 1980s or 1990s or things like that. Things have improved a lot, and the credit goes to the entire infrastructure, meaning, you know, the residency, I would say, and the exchanges, and the industry, finance industry, and the corporate ministry, and all, all those things. But you’re also part of the ecosystem. Well, as I said, yes, it’s the entire infrastructure.
Mubina Kapasi: What is the role you take on as a merchant banker or an investment banker in trying to make an IPO a successful one?
Sunil Shah: We have this checklist kind of thing. You see, like, we are business-agnostic, but we see then the good business, which has huge potential going forward. Within 10 years, today, and then listing the market cap is so much, you can go here, the profit is today X, you can go 5X, 7X, something like that. Then there are other things, like, you know, for private donors, how they are, and think that.
So we have our internal processes and systems. We adhere to that. And once every box is ticked, then only we accept and take that proposal for the IPO option.
Mubina Kapasi: Now, you mentioned that there is this SME platform, a wonderful one for companies and for investors as well. So far, we used to see investors mostly investing in your brands, like Tatas, Bluechips. So why do you think now that investors are moving to SME as well or looking at SME as an option? Because over subscription numbers over there are through the roof. So what do you think is the reason?
Sunil Shah: First of all, I’ll tell you. SME activities are for informing investors as per the guidelines. So a person, an informed investor’s dedication, everybody knows, I don’t. So that is one thing. Second thing, I feel that, you see, what is happening, a company which has a huge base, like what I call market cap, will produce returns, which should be, you know, in the early teens or something like that. That’s what we have seen, and I’m generalizing here.
But those which are narrow base market cap and narrow, there is, the growth could be huge. It ought to be finite things or something. Obviously, people have understood those things, and they have started investing in that.
And mostly, I tend to remember those subscription numbers because of the listing aids. People are attracted towards listing aids. There are lots of investors as well, but listing aid is one of the team.
Mubina Kapasi: Now, my last question, or rather my second last question, because I have something reserved as a question to ask you. What do you think goes behind moving a company from the SME exchange to the mainboard?
Sunil Shah: Well, there are a few criteria. There’s that story of listing, profit, market cap, and things like that. I mean, my team would know more about it because they did and dealt with it, but there are such criteria for that. So it’s not like, at all, somebody moves from SME to mainboard. There are strict criteria set by the exchanges in accordance with SEBI guidelines.
Mubina Kapasi: Well, my last question. Mr. Shah is also an ardent fan of classical music. In fact, I think he dabbles a bit in classical singing as well. So he does not just manage money for companies or raise money rather for companies. He also perhaps entertains them well with his performances. So I request you as well to put up a performance for our viewers.
Sunil Shah: I can say one thing about myself. I’m a connoisseur of English cinema songs from the fifties and sixties. So that’s because I feel, I mean, if I take your time, I feel that, you know, it’s a confluence of three things.
Philosophy, lyrics, super, super vocal, the singers, and the composition and orchestration. Confluence of these three things, because these three, we are people of taste. Philosophy is the melody.
And when you listen to these songs and when you know the nuances, you feel that it’s all about life. So that’s why I love them. And it was supposed to be a golden era. That’s what they say of the fifties and sixties. So, yeah, I love those songs. And sometimes I recite them. And let me think, which song is, if you think the notation that I will say, like, there was this song.
Mubina Kapasi: All right, Mr. Shah, it was lovely speaking with you. Thank you so much for the performance and for, of course, all of your insight.