THE CAPITAL MARKET PROBLEM THAT CREATED NASDAQ
In today’s world, NASDAQ can hardly be separated from technology. Apple, Microsoft, NVIDIA, and Amazon have transformed it into an emblem of innovative and fast-growing enterprises. However, the NASDAQ stock market was not founded to become a technology stock market. It was founded to address a problem of American capital markets.
Before 1971, large corporations had the opportunity to trade on the well-established stock markets like the New York Stock Exchange. Small firms used to trade in the fragmented over-the-counter (OTC) market.
The problem with the OTC market was its inefficiency. Dealers communicated prices via telephones; there was no common electronic system for quote comparison, and information differed among different dealers. It was not the problem of the lack of companies, but rather the lack of efficient market infrastructure.
On February 8, 1971, the National Association of Securities Dealers introduced the National Association of Securities Dealers Automated Quotations, or NASDAQ. Its initial task was very simple: to collect and to display bid/ask prices for OTC securities.
At first, NASDAQ did not engage in any electronic execution of trades. The old dealer model was used for trading. For the first time, however, participants could access competing quotes electronically and simultaneously.
This small change led to the revolution of the market itself. Information became faster and more accessible; dealers competed among themselves; the proximity to the trading floor became less important.
NASDAQ had not yet become a technological marvel. At first, it was an information solution.
Why this mattered for emerging companies?
This distinction is important because the deeper purpose of NASDAQ was market access.
Traditional exchanges had evolved around larger, established companies. But an economy also produces businesses that are younger, smaller and still developing. These companies may have growth potential without having the size, history or institutional profile associated with established corporations.
A capital market therefore needs more than one type of infrastructure. It needs a way for companies at different stages of development to access investors.
NASDAQ gradually became part of that infrastructure.
Its electronic structure and dealer-based model created a market that was particularly well suited to a broader universe of companies. Over time, technology and growth companies increasingly found a natural home there. Intel listed in the early years of NASDAQ’s existence, Apple followed in 1980 and Microsoft in 1986.
The association between NASDAQ and innovation was therefore built gradually.
The exchange did not begin with a plan to become the home of America’s technology giants. Rather, it created a market structure that was more adaptable to emerging companies. As America’s technology economy expanded through semiconductors, personal computing, software and eventually the internet, many of those companies grew alongside the exchange.
NASDAQ changed. But the economy changed with it.
Today, the Nasdaq Composite includes thousands of securities and is widely regarded as one of the most important benchmarks for technology related segments of the American economy. Yet its modern identity can obscure its original purpose.
NASDAQ’s story did not begin with Apple or NVIDIA, but with a much more fundamental question:
What happens when an important part of an economy does not have capital market infrastructure designed for it?
A question that was also relevant to India.
Because decades later, India found itself facing a similar, although much larger, challenge. The country had millions of businesses, thousands of capable entrepreneurs and a rapidly expanding economy.
But for a long time, there was a missing link between a successful private business and India’s public equity markets.
And that was India’s capital market problem.
INDIA HAD THE BUSINESSES. IT NEEDED THE MARKET.
India’s capital market problem was, in some ways, even more striking than the one that gave birth to NASDAQ.
India did not lack entrepreneurs. It lacked a sufficiently developed path through which successful small businesses could become public companies.
The scale of the underlying economy makes this gap difficult to ignore. India has more than 70 million enterprises, with MSMEs contributing around 31% of GDP, 35% of manufacturing output and 49% of exports. The sector is also the country’s second largest source of employment after agriculture.
Yet only a tiny fraction of these businesses have historically had access to public equity markets. For most Indian entrepreneurs, the journey from a small private business to a listed company was not a gradual progression. It was a jump.
A company could begin with promoter capital, rely on retained earnings and eventually borrow from banks. But once it reached a stage where it needed significantly larger amounts of capital, the mainboard IPO market often remained too distant.
That created a missing middle in India’s corporate financing ecosystem.
The missing stage between a private business and the mainboard
India’s mainboard was built for companies that had already achieved significant scale.
This was not necessarily a flaw. Large public markets need strong disclosure standards and companies capable of handling the responsibilities of public ownership. But the structure left a difficult question for smaller businesses.
What happens to a company that is successful, growing and profitable, but still too small for the conventional mainboard route?
For decades, the answer was largely private capital and debt. A promoter could reinvest profits. The company could borrow from banks. It could bring in private investors. It could grow gradually through internal cash generation. But each of these sources has limitations.
Promoter capital is finite. Retained earnings take time to accumulate. Private capital is not available to every business. And debt has to be repaid regardless of whether the company’s expansion works as planned.
This matters particularly for businesses entering a new phase of growth. Expanding manufacturing capacity, entering new geographies, developing products or building distribution networks often requires capital before the associated revenues arrive.
A company financed entirely through debt can become vulnerable if growth takes longer than expected. This is where public equity can play a fundamentally different role.
Unlike debt, equity does not create a fixed repayment obligation. The investor participates in both the risks and the potential upside of the business. For an entrepreneur, this can provide a form of permanent growth capital that is particularly useful when a company is trying to move from one level of scale to another.
The problem was that India had millions of businesses at the bottom of the economic pyramid and a large, sophisticated mainboard at the top, but relatively little public market infrastructure designed specifically for the journey in between.
India’s entrepreneurial economy was growing faster than its capital market pathways
The gap became more significant as India’s economy expanded.
Over the past several decades, the country developed thousands of specialised businesses across manufacturing, engineering, textiles, chemicals, pharmaceuticals, consumer products and services. Many of these companies built genuine operating capabilities and established strong positions within their industries.
But success in business did not automatically create access to public equity. A company could spend twenty years becoming a strong regional manufacturer and still remain entirely dependent on promoter capital, retained earnings and bank financing.
This was particularly important because India’s entrepreneurial economy is highly decentralised.
Unlike a model centred around a few large corporations, Indian business is spread across hundreds of cities and industrial clusters. A precision engineering company in Pune, a chemical manufacturer in Gujarat, a textile business in Surat or a pharmaceutical supplier in Indore could build a viable and profitable enterprise without ever becoming large enough to enter the traditional public market.
These businesses were economically important. But they were largely invisible to public investors. This created an interesting disconnect.
India’s economic growth was being supported by a vast universe of private enterprises, while the public equity market represented only a relatively narrow section of that corporate economy.
The question was therefore not simply whether smaller businesses needed more money. It was whether India’s capital markets needed a mechanism through which successful private businesses could gradually enter the public corporate ecosystem.
By 2025, the scale of the difference was still evident. NSE alone had 2,358 companies listed on its mainboard, while its SME platform had grown to 704 listings since inception. Yet even these more than 700 companies represent only a microscopic fraction of India’s broader MSME universe.
The opportunity, therefore, was never to bring millions of small businesses into the stock market. That would neither be practical nor desirable.
The opportunity was to create a credible pathway for the relatively small proportion of businesses that had already developed the scale, profitability and ambition required to become public companies.
India needed a bridge. A stage between being a successful private business and becoming a full scale mainboard listed corporation.
And in 2012, India’s two major stock exchanges began building one.
INDIA BUILDS ITS OWN PATH TO PUBLIC CAPITAL
India’s answer arrived in 2012.
That year, the country’s two major exchanges created dedicated platforms for smaller businesses. The Bombay Stock Exchange launched BSE SME in March 2012, followed by the National Stock Exchange’s NSE EMERGE platform later that year.
The idea was straightforward, but important.
Instead of expecting every business to jump directly from private ownership into the mainboard, India created a separate route for companies that had developed beyond the early stages of entrepreneurship but had not yet reached the scale traditionally associated with larger listed companies.
A different entry point into the public market
The SME platforms were not created by simply lowering standards and allowing smaller companies to list more easily. They were designed as a separate market structure.
Companies could raise smaller amounts of capital, while operating within a regulatory framework that recognised the realities of emerging businesses. The exchanges also introduced mechanisms such as compulsory market making to support trading liquidity, recognising that smaller companies could not initially rely on the depth of investor participation available on the mainboard.
The underlying logic was important. A public listing should not be treated as the final destination of a successful business. It could also become part of the growth process.
A company could raise equity capital, expand its operations, improve governance, build a wider shareholder base and eventually graduate to the mainboard after reaching a larger scale.
This created something closer to a corporate development pathway.
The pathway is still developing, but it has already begun to demonstrate that smaller companies can use the public market as more than a one-time fundraising event.
By the end of 2025, NSE EMERGE had facilitated 704 SME listings since inception, with companies collectively raising more than ₹21,000 crore. The platform’s listed market capitalisation had reached approximately ₹2.2 lakh crore, while 156 companies had migrated from the SME platform to the mainboard.
These numbers matter because they demonstrate that the SME market is no longer an experiment operating at the margins of India’s capital markets. It is beginning to create its own pipeline of listed businesses.
From access to an ecosystem
The development of the SME market has also changed the way a smaller company can think about growth.
Historically, a successful private business had limited options once internal cash generation and bank borrowing were no longer sufficient. Public equity was theoretically available, but the costs, compliance requirements and scale expectations associated with the mainboard made it inaccessible to many companies.
The SME platforms changed that equation. An entrepreneur could now consider public capital at an earlier stage of the company’s corporate journey.
That does not mean every SME should list. Most businesses are neither large enough nor suitable for public ownership. Listing brings reporting obligations, greater scrutiny and the need to manage the expectations of public shareholders. But for companies that have reached a certain level of operational maturity, public equity can provide something different from conventional borrowing.
It can fund capacity expansion without creating fixed repayment obligations. It can strengthen the balance sheet before a company takes on additional debt. It can provide capital for new facilities, working capital, product development or expansion into new markets.
Equally important, listing can force a business to institutionalise.
A promoter driven company must gradually develop stronger financial reporting, governance systems and disclosure practices. Ownership, which may once have been concentrated within a family, begins to broaden. Decisions that were previously internal become subject to shareholder scrutiny.
The growth of these platforms over the past decade suggests that the demand for such a pathway was real. By 2025, India had moved from an environment where public equity was largely the domain of established corporations to one where smaller businesses could also begin participating in the capital market.
The next question, however, is perhaps the most interesting one.
What kind of businesses are actually using this bridge?
The answer reveals why India’s SME market may be developing into something very different from NASDAQ.
THE NASDAQ COMPARISON: WHAT IS INDIA’S SME MARKET ACTUALLY CREATING?
By this point, the obvious comparison begins to emerge.
NASDAQ and India’s SME platforms were both created to address a capital market gap. Both created a dedicated route for companies that did not fit comfortably into the traditional structure of the market.
But once we look at the companies actually using these platforms, the similarity begins to change.
NASDAQ eventually became closely associated with semiconductors, software, computing and internet businesses. India’s SME market, at least today, is telling a very different story.
It is dominated not by digital platforms, but by the physical economy.
India’s SME market looks more like India’s economy
The composition of the Nifty SME EMERGE Index provides a useful snapshot.
As of April 30, 2026, Capital Goods accounted for 34.41% of the index, making it by far the largest sector. The next largest sectors were Services at 8.89%, Fast Moving Consumer Goods at 6.63%, Consumer Durables at 6.20%, Healthcare at 6.01% and Information Technology at 5.86%. Chemicals accounted for 4.49%, while Construction represented 5.63% and Automobile and Auto Components another 2.41%.
The contrast with NASDAQ is immediately visible. This does not mean that India lacks technology companies. It means that technology is not currently the defining feature of its emerging public corporate universe.
The companies entering India’s SME market are more likely to manufacture equipment than develop global software platforms. They may produce industrial components, consumer products, chemicals, packaging materials or specialised machinery. Others operate in healthcare, business services and niche areas of the consumer economy.
The market is therefore giving public investors access to a part of India that is often difficult to see through the mainboard indices.
India’s large listed market is dominated by established corporations. The SME market offers a view of businesses that are still much closer to the country’s underlying production economy.
This pattern is also visible in the primary market.
In 2024, 69 of the 178 companies listed on NSE EMERGE belonged to the Industrials sector, raising approximately ₹3,002 crore, or 41% of the total capital raised on the platform. Consumer Discretionary accounted for another ₹1,174 crore, while Information Technology companies raised approximately ₹964 crore.
The trend continued into FY26. By November 2025, Industrials, Consumer Discretionary and Materials together accounted for 71% of total funds raised through NSE EMERGE IPOs. Importantly, 95% of the capital raised was fresh equity, underlining that the platform was still functioning primarily as a source of growth capital rather than a route for existing shareholders to exit.
This is an important distinction. India’s SME market is not simply producing smaller versions of its existing large listed companies. It is bringing a much wider layer of the economy into public markets.
The public market is beginning to capture India’s industrial clusters
India’s entrepreneurial economy has never been concentrated in one place
It is spread across manufacturing and business clusters that developed around particular skills, supply chains and industries. Pune has a deep engineering and automotive ecosystem. Gujarat has clusters across chemicals, engineering and manufacturing. Surat is closely associated with textiles and related industries. Morbi and Rajkot have long developed specialised manufacturing capabilities.
The government’s own MSME cluster programmes are built around this reality. The Cluster Development Programme identifies groups of enterprises that share common production capabilities, technologies, skills and infrastructure, with the objective of improving their productivity and competitiveness.
The SME exchanges are beginning to provide a financial layer to this existing industrial geography.
A company that may once have remained a regional supplier can now access public equity without first becoming a large national corporation. This allows businesses from specialised clusters to enter a broader pool of investors while remaining rooted in the industries where they originally developed their capabilities.
The geographical data from NSE EMERGE illustrates how decentralised this corporate pipeline remains.
During the first eleven months of FY25, companies from Maharashtra and Gujarat accounted for 79 listings, roughly half of all new NSE EMERGE listings during the period. Together, they raised approximately ₹3,077 crore, representing 45% of the total capital raised. Delhi, West Bengal and Rajasthan also made meaningful contributions.
The point is that India’s public SME market is beginning to draw companies from a much broader geographical and industrial base than the traditional image of corporate India suggests.
This is where the NASDAQ comparison becomes more interesting.
NASDAQ eventually became a reflection of the industries driving America’s technological transformation. India’s SME market may similarly become a reflection of the industries and entrepreneurial clusters driving India’s next phase of economic development.
But the composition will be different because the underlying economy is different. At least today, India’s emerging corporate universe is being built around physical manufacturing, specialised engineering, consumer businesses and regional enterprise.
That raises an important question for the next stage of this story.
If these companies are becoming public at an accelerating pace, how does the market ensure that the rush for capital does not turn into a rush for speculation?
That question would soon force India’s regulator to step in.
WHEN THE SME BOOM WENT TOO FAR; SEBI STEPPED IN
By 2024, India’s SME market had become one of the most exciting corners of the country’s capital markets.
The number of companies listing was rising rapidly. IPO subscriptions were reaching extraordinary levels. Listing day gains were attracting a growing number of retail investors. For many market participants, an SME IPO increasingly appeared to be an opportunity to capture a quick listing gain rather than an investment in a young public company.
The growth was remarkable. NSE EMERGE recorded 178 IPOs in 2024, raising ₹7,348 crore, its strongest year since inception. But the speed of the boom also exposed an uncomfortable question.
Was India building a deeper capital market for emerging businesses, or simply creating another arena for speculation?
A public market can only become a lasting part of an economy if investors trust the companies entering it. If public listings are associated primarily with manipulated financials, promoter exits, questionable use of proceeds and short-term speculation, the market eventually damages the very confidence required for it to grow. This was the point at which SEBI stepped in.
From easy access to greater accountability
The regulator’s concern was not with SME companies raising capital. The concern was with the quality of companies entering the market and the behaviour surrounding some IPOs.
SEBI had already cautioned investors in August 2024 about exaggerated claims and unrealistic expectations surrounding SME stocks, highlighting the risks associated with unregulated social media recommendations and sharp price movements.
The regulatory response that followed was designed to make the SME market more selective.
One of the most significant changes was the introduction of stronger financial eligibility requirements. NSE introduced an additional requirement that companies filing their draft prospectus from September 2024 onwards should have positive Free Cash Flow to Equity in at least two of the previous three financial years. This was important because profitability on paper does not necessarily mean that a company is generating cash.
A company can report accounting profits while its cash remains tied up in receivables, inventory or other working capital requirements. Requiring a stronger cash flow record therefore pushed the focus beyond reported earnings and towards the underlying quality of the business.
SEBI also tightened the way IPO proceeds could be used.
The amount that an SME issuer can allocate towards general corporate purposes was capped at 15% of the amount raised or ₹10 crore, whichever is lower. The regulator also decided that companies raising more than ₹50 crore through fresh issuance would be required to appoint a monitoring agency to oversee the use of IPO proceeds.
These changes may appear technical, but their purpose is straightforward. The more clearly investors can understand where their money is going, the more credible the market becomes.
The regulatory framework also moved towards reducing the ability of an SME IPO to function primarily as an exit route for existing shareholders. The broader direction was clear: public capital should increasingly support corporate growth rather than simply provide liquidity to promoters.
SEBI also proposed and consulted on raising the minimum application size for SME IPOs from approximately ₹1 lakh to above ₹2 lakh, reflecting concerns around excessive speculative participation and leveraged applications.
The message behind these measures was difficult to miss. India wanted an SME market. But it wanted one built around businesses, not listing day excitement.
The reset was visible in the numbers
The immediate consequence of tighter rules was a moderation in activity.
In 2025, the number of IPOs on NSE EMERGE fell to 117, compared with 178 in 2024. Total funds raised declined from ₹7,348 crore to ₹5,784 crore. At first glance, those numbers could suggest that the SME boom was losing momentum.
But another number tells a different story.
The average IPO size increased from ₹41 crore in 2024 to ₹49 crore in 2025. That is precisely the kind of shift that matters when evaluating whether a market is maturing. The number of listings declined, but the average size of the companies accessing public capital increased. The market was becoming more selective without disappearing.
This is where the distinction between an IPO boom and a capital market becomes important. An IPO boom is measured through headlines.
How many times was an issue subscribed? How large was the listing gain? How many companies listed during the year?
A capital market is measured differently.
Are companies raising capital for productive purposes? Are disclosures credible? Are investors able to trust the financial information? Do companies continue to perform after listing? And can the market retain investor confidence through both strong and weak cycles?
India’s SME market is now moving towards this more demanding test.
The regulatory reset may reduce some of the excitement that defined the earlier phase of the boom. But that does not necessarily weaken the larger experiment.
In fact, it may be essential to its survival.
NASDAQ did not become an important part of America’s innovation economy simply because companies could list there. Its long-term relevance depended on investors treating it as a credible market through which companies could repeatedly raise capital, grow and eventually become institutions of enormous scale.
India’s SME exchanges face the same institutional challenge, even if the companies and the economy behind them are very different. The next phase of the SME revolution will therefore not be defined by how quickly companies can enter the market. It will be defined by what public capital allows them to do once they are inside it.
But there is another reason why the next phase could be particularly important.
The regulatory reset is happening at a time when SEBI is also considering changes that could fundamentally expand the size and accessibility of the SME market. If the previous phase was about bringing SMEs into the public market, the next phase could be about allowing a much larger set of companies to participate, while making the market more liquid and institutional.
In other words, India may be moving from building the SME market to scaling the SME market.
And that could change the opportunity not just for entrepreneurs, but for investors as well.
THE NEXT PHASE: COULD INDIA’S SME MARKET BECOME MUCH BIGGER?
For years, the SME exchanges have been solving one problem: giving smaller businesses access to public equity. But the next phase could be much more important. The question is no longer simply whether Indian SMEs can raise money through the stock market. It is whether the SME market itself can become significantly larger, more liquid and more institutional.
That possibility is particularly interesting because the market has already demonstrated that there is demand for SME equity. The average SME IPO size increased from ₹13 crore in FY20 to ₹49 crore in FY26. By February 2026, SME companies had mobilised ₹11,136 crore through IPOs. C
But the existing market is still small relative to the size of India’s entrepreneurial economy. That is where the next set of regulatory changes could become important.
The addressable market could expand dramatically
The current SME framework was designed for relatively small businesses. Under the existing framework, companies with post issue paid up capital above ₹25 crore generally need to migrate to the mainboard.
SEBI is now considering a much broader framework. Reports suggest that the regulator is examining an increase in the SME paid up capital threshold to ₹100 crore, alongside a market capitalisation-based framework that could allow companies with market capitalisations between ₹1,000 crore and ₹4,000 crore to access the SME platform under certain conditions. These are proposals under consideration, not final regulations.
Imagine the difference between a market designed primarily for companies that need ₹20 crore or ₹30 crore of capital and one that can accommodate businesses raising substantially larger amounts and growing into the ₹1,000 crore, ₹2,000 crore or ₹3,000 crore range. The SME segment would no longer simply be a stepping stone for very small businesses. It could become a much broader market for India’s emerging mid-sized companies.
And that has direct implications for the SME index.
The Nifty SME EMERGE Index is free float market capitalisation weighted. This means its future growth does not depend only on existing constituents becoming more valuable. A larger pool of eligible companies, larger IPOs, companies graduating into higher market capitalisation brackets and greater free float can all increase the economic footprint of the index.
In other words, the opportunity is not simply for the companies already sitting inside the index to grow. The index itself could have a much larger universe to draw from.
Liquidity could be the second big change
The biggest weakness of the SME market has always been liquidity. Smaller issue sizes, concentrated ownership and the existing trading structure can make it difficult for investors to enter and exit positions efficiently.
This is where the proposed reforms could be meaningful.
SEBI is reportedly considering allowing trading in individual shares rather than requiring investors to transact in large minimum lots. It is also reviewing the existing market making framework and other mechanisms that influence liquidity.
If implemented effectively, these changes could make SME stocks accessible to a much wider pool of investors. More importantly, better liquidity can change investor behaviour. Investors are more willing to allocate capital when they know that they can eventually exit without facing an excessively wide gap between the quoted price and the price at which they can actually transact.
This could create a positive feedback loop. Better liquidity attracts more investors. More investors create deeper trading activity. Deeper trading activity improves price discovery. Better price discovery can make institutional participation easier.
That brings us to perhaps the most important proposed change.
The SME market could become more institutional
The current SME market has been heavily dependent on retail participation. SEBI is reportedly considering increasing the allocation available to qualified institutional buyers to as much as 50%, with anchor investors potentially receiving a significant portion of that allocation. The regulator is also considering stricter profitability requirements for companies seeking to list.
This could change the character of the market.
Institutional investors do not eliminate risk, but their participation can introduce a different level of analysis, due diligence and price discovery. A company looking to raise capital would increasingly need to demonstrate that it has a scalable business, credible financial statements and a pathway towards becoming a larger company.
That is important because the ultimate objective should not be to create a market where companies simply graduate from private ownership to public ownership. The objective should be to create a market where public capital helps good companies graduate from small businesses into larger institutions.
This is where the SME market connects back to the broader economic story.
Why this could matter for the SME index?
The SME index has already delivered extraordinary long-term returns, but the recent correction and regulatory reset have changed the starting point. The market has moved through a period of exuberance, weak listings and regulatory scrutiny. The next phase could therefore look very different from the last one.
If the proposed reforms eventually expand the eligible company universe, improve trading liquidity and bring more institutional capital into the segment, the SME market could enter a new growth cycle.
The potential expansion would come from several directions at once. More companies could become eligible. Existing companies could become larger before migrating to the mainboard. Larger companies could enter the index. Institutional participation could improve liquidity and price discovery. And companies that successfully use public capital to compound their businesses could increase their free float market capitalisation over time.
This is why simply looking at the historical size of the SME market may underestimate its future potential.
The opportunity is that India is potentially building a much larger funnel through which a small number of successful businesses can become tomorrow’s mid-caps and large caps.
NASDAQ did not become important merely because thousands of companies listed on it. Its importance came from becoming a financial infrastructure through which entrepreneurial companies could access public capital and grow. India does not need to recreate NASDAQ’s technology heavy composition. It needs to create its own equivalent pathway for the companies driving Indian industrialisation, manufacturing, services and consumption.
The infrastructure has already been built. The regulatory reset is underway. If the next set of reforms succeeds in expanding the universe, improving liquidity and institutionalising the market, the SME segment could be entering the most important phase of its development yet.
And that raises the bigger question: if the market is being cleaned up precisely when its addressable universe could expand dramatically, could this be the beginning of the next major growth cycle for India’s SME equities?
THE SME REVOLUTION: IS THE NEXT GROWTH CYCLE BEGINNING?
For much of the past two years, the SME market was a segment to approach with caution. The spectacular rally between 2021 and 2024 had pushed valuations to levels that were increasingly difficult to justify, while concerns around speculation, liquidity and governance began to emerge. By September 2024, the risk reward equation had changed enough for us to step away from the segment.
But markets rarely become interesting when everything looks comfortable.
They become interesting when expectations have been reset, valuations have compressed and the underlying structural story remains intact.
That is where the SME market finds itself today.
The correction may have changed the opportunity
The BSE SME IPO Index has undergone a substantial correction from its previous peak. As of March 23, 2026, the index had fallen roughly 38% from its high. Interestingly, this is almost exactly in line with the historical pattern shown by the index. Over its history, the average drawdown has been around 39%.
A 39% drawdown does not automatically mean that a market has bottomed. But it does provide useful context. The current decline is no longer an ordinary pullback from the recent highs. It is comparable with the deeper corrections that the SME market has historically experienced.
More importantly, the valuation reset has been equally striking.
The BSE SME IPO Index is trading at one of its cheapest PE valuations since 2019. After spending much of the 2021 to 2024 period at significantly higher valuation levels, the correction has brought valuations back towards levels that are far removed from the speculative excess that characterised the previous phase.
The official BSE factsheet at the end of March 2026 put the index PE at 9.43 (as of 8th September, 2026 it is 13.1), although valuation data can move sharply as constituent earnings and prices change. The index had also declined 22.86% during the first quarter of 2026. This is an important change in the setup.
And the long-term performance of the index puts the recent correction into perspective. The BSE SME IPO Index has delivered a CAGR of approximately 62% since its inception in August 2012.
The primary argument is no longer that valuations can continue expanding. The segment now reflects a market where a substantial correction has already taken place, valuations have compressed, and the regulatory framework is being strengthened at the same time that the potential universe of eligible companies could expand.
That combination is what makes the current phase interesting.
From broad caution to selectivity
This does not mean that every SME stock suddenly becomes attractive.
In fact, the opposite may be true. A broad SME index can contain companies with very different levels of governance, profitability, competitive advantage and growth potential. The correction does not eliminate these differences.
What has changed is the opportunity to be selective.
The focus can now shift from avoiding the entire segment to identifying businesses where the underlying operating opportunity is large enough to justify taking the additional risks associated with smaller companies.
The most interesting businesses may be those capable of significantly increasing their revenues and earnings over the next three to five years, while maintaining healthy returns on capital and strengthening their balance sheets.
Consider a simple example. If a company can double its revenue over three years and translate that growth into a meaningful increase in earnings, the investment outcome does not need to depend entirely on valuation expansion. Business growth itself can become the primary driver of value creation.
This is a very different proposition from buying an SME simply because its share price has risen rapidly or because its IPO was heavily subscribed.
The next SME cycle, if it develops, should therefore be about business compounding rather than speculative momentum.
Why the index could have another major growth cycle?
The structural reforms discussed in the previous section make this even more interesting.
The SME market is potentially entering a phase where several things can happen simultaneously. The eligible universe could become larger. Companies with greater scale could enter or remain within the SME ecosystem for longer. Trading could become more accessible. Institutional participation could increase. Research coverage could improve. And successful businesses could continue compounding their earnings.
The BSE SME IPO Index itself is float adjusted market capitalisation weighted and has over 150 constituents. This means the index does not need every constituent to perform exceptionally well for the overall opportunity to become much larger.
A larger universe can add new successful businesses. Existing constituents can increase their market capitalisation. Companies can grow into much larger enterprises. Greater liquidity can improve price discovery. Institutional participation can broaden the investor base.
These forces can reinforce one another.
This is why we believe a scenario in which the SME index doubles from the current levels over a multi-year period cannot be dismissed. It should not be treated as a forecast or an expectation that every SME stock will double. Rather, it represents a possible outcome if earnings growth, new company additions, greater market participation and a healthier regulatory environment come together.
This is why a scenario in which the SME index re-rates meaningfully, potentially even doubling, from current levels over a multi-year period is worth taking seriously rather than dismissing outright. This is not a forecast or a base-case expectation that every SME stock will double. It represents one possible outcome if earnings growth, new company additions, greater market participation and a healthier regulatory environment come together.
The important point is that the potential upside does not have to come from valuations returning to the extreme levels seen during the previous cycle. It can come from the market becoming fundamentally larger.
So, is this another bubble?
There is an obvious counterargument.
The SME segment remains risky. Small companies can have concentrated ownership, limited liquidity, weaker governance structures and greater sensitivity to economic cycles. The recent correction itself demonstrates how quickly sentiment can change. Even after a substantial decline, some companies may still be expensive relative to their fundamentals.
The fact that the index has historically experienced 39% drawdowns also works both ways. It tells us that deep corrections are normal in this segment. Investors entering after a correction must still be prepared for considerable volatility.
But this is precisely why the current phase should not be viewed as simply another broad-based SME buying opportunity. The opportunity lies in separating the SME market from individual SME businesses.
The market can be entering an attractive phase while many individual companies remain poor investments.
The bigger question is what happens next
There have been quite a few infrastructure measures that have been put in place by India to enable SMEs’ access to public equity. India has exchanges that are exclusively dedicated to SMEs; there is an IPO infrastructure in place, a considerable number of listed companies, and even a route available for those successful SMEs to migrate to the main board. The regulations are also becoming more stringent, considering the problems witnessed during the previous SME boom.
This may very well turn out to be a completely different story. With a much bigger potential universe, more institutional participation, and better market infrastructure, the possibility of scaling the SME segment is real. It is even more interesting considering the recent correction that has hit the segment.
This is what differentiates the current system from the previous SME boom cycle. The earlier cycle was all about uncovering the SME segment, while the next one may be all about scaling it.
In such a case, the SME sector may prove to be a critical driver of the future mid-cap and large-cap companies of India. Just like NASDAQ, its relevance may not necessarily lie in every listed company prospering but in building a sustainable environment for the next generation of businesses to raise money and flourish.
The path would not be easy. There will be failures, course corrections, regulatory problems, and speculations. However, given the more than 20 months since they were shunned by the market, the combination of a greater extent of corrections, improved valuations, and greater regulation makes it worthwhile to re-enter the SME segment.
That is also where this story began. In March 2026, we wrote about the sharp correction in the SME index and asked whether the market had reached a potential sweet spot again (Read the original post here).
And if the next cycle is driven by companies that can genuinely increase their revenues and compound their earnings, rather than simply by expanding valuations, the opportunity could be much more durable than the last one.
(All data, facts and figures cited in this piece are drawn from publicly available sources, including exchange disclosures, regulatory filings and press reports, and are believed to be accurate as of the dates referenced. This piece is intended for general informational purposes only and does not constitute investment advice, a research recommendation, or a solicitation to buy or sell any security. Views expressed are analytical in nature and may evolve as new information becomes available. Readers should independently verify any data point before relying on it and consult a qualified financial adviser before making investment decisions).
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