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SME IPOs – Everything you need to know

Small and medium-sized businesses, or SMEs for short, are now a crucial component of India’s socioeconomic growth. SMEs provide more job opportunities and have low capital costs. More than 66 lakh new businesses have been registered nationwide as of 2022. Most SMEs are privately held businesses that are supported by individual investors. But, by going public with your SME, you can raise money from investors in the general public. Learn more about SME IPOs by reading on.

What is an IPO?

A company can raise money in the open market for the first time in exchange for equity shares in the company through an initial public offering (IPO). Every business needs money to grow, and there are two ways they can get that money: either through bank loans or by raising money from the general public. In the latter case, a business uses an initial public offering (IPO), in which its management sells a portion of the business to prospective investors, effectively making them co-owners.

However, the company must register with the Securities and Exchange Board of India (SEBI) and designate underwriters to help with the share sale process before being eligible for an IPO. Individual investors may now participate in the IPO once SEBI has given the green light. In addition, the company becomes a publicly listed entity when the IPO issue closes and the shares are listed on the National Stock Exchange and the Bombay Stock Exchange.

Within the IPO process there is a separate way of raising funds for the small companies, called SME IPO.

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Features of SME IPOs

Before the stocks are listed, traded, or exchanged, a SME must announce an IPO at a SME platform during an exchange. The SME’s post-issue paid-up capital shouldn’t be more than ₹25 crore. Directors, promoters, investors, and other stakeholders in SME initial public offerings (IPOs) must meet the same eligibility requirements as those for traditional IPOs: they cannot be defaulters, offenders, or excluded from the capital markets. NSE Emerge and BSE SME are the SME platforms of the NSE and BSE, respectively.

BSE SME Eligibility Requirements

  1. The company must be incorporated under the Companies Act, 1956.
  2. The company should have a positive net worth.
  3. The net tangible assets of the company should be ₹1.5 crore.
  4. The company should have a track record of operations of a minimum of 3 years. If not, the company should have been funded by banks/financial institutions/central government or state government or the group company, which should be listed for a minimum of 2 years on either the main board or SME board of BSE. It should have positive cash accruals (earnings before depreciation and taxes) in any year of the last 3 years.
  5. The company should have a website.
  6. The company should facilitate trading in Demat form and also have an agreement with both Indian depositories CDSL and NSDL.
  7. The list of promoters should not have changed in the preceding year from the date of applying to BSE for listing under the SME segment.
  8. There are also additional criteria for microfinance companies and broking companies in BSE SME.
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NSE Emerge Eligibility Requirements

  1. The company should be incorporated under the Companies Act 1956/2013.
  2. The company or the promoters/promoter company should have a track record (operations) of at least 3 years. If it is a proprietary/partnership firm converted into the present company, then there should be a minimum 3-year track record of the firm.
  3. The company should have operating profit in at least 2 out of 3 fiscal years and also have positive net worth.
  4. There should be no pending Board for Industrial and Financial Reconstruction (BIFR), insolvency or bankruptcy proceedings against the company or promoters.
  5. The company should not have received any winding-up petition from NCLT/Court.

There are additional requirements in terms of disclosures and merchant banker requirements. If an application is rejected, the SME cannot apply for at least the next 6 months for an IPO. The minimum application and trading lot size shall not be less than ₹1 lakh.

Difference between SME IPO and Mainboard IPO

There are two types of IPO commonly:

  1. Mainboard IPO
  2. SME IPOs – Small and medium enterprises

If small and medium enterprises want to raise money from the public they will have to file for an IPO either on the SME platform of BSE or Emerge platform of NSE.

SME IPOMainboard IPO
Post-issue paid-up capital of SME companies should be between ₹1 cr – ₹25 cr.For mainboard IPO it is a minimum ₹10 crore.
Application size is greater than ₹1 lakh for 1 lot.Ranges between ₹10,000 – ₹15,000.
IPO underwriting is mandatory (100% underwritten with Merchant Banker underwriting 15%)IPO underwriting is not mandatory (Under 50% compulsory subscription to QIBs)
Stock exchange vets the offer documentSEBI vets the offer document
3-4 months of IPO time frame6 months of IPO time frame
Can’t sell shares individually. Need to sell the entire lot.Can sell shares individually on the secondary market.
Companies need to half-yearly report mandatorily.Companies need to provide quarterly report mandatorily
The minimum number of allottees should be 50.The minimum number of allottees should be 1000.
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Advantages of SME IPO

SME IPO can provide several benefits to a small or medium-sized company. Some of these benefits include:

  1. Access to capital: By going public, SMEs can access a broader pool of capital than through traditional bank loans or private equity.
  2. Increased visibility: A public listing can help an SME increase its visibility and reputation in the market.
  3. Liquidity: The shares of a public company are traded on stock exchanges, which can provide liquidity to shareholders.
  4. Valuation: A public listing can increase the valuation of a company, making it more attractive to potential investors or buyers.
  5. Employee rewards: Offering stock options or performance-based bonuses to staff members can be made possible by a public listing.

Why does SME IPO matter?

  • SME IPOs provide several benefits for SMEs, including access to capital for growth, increased visibility, and improved credibility with customers, suppliers, and other stakeholders. These benefits can translate into increased sales, higher profits, and more job creation.
  • Corporates and entrepreneurs can raise money through listing to finance new initiatives, expansions, diversifications, and acquisitions.
  • This method of obtaining capital through the infusion of equity can assist the companies in efficiently raising borrowed funds.
  • Equity financing lowers the debt burden leading to lower financing costs and healthier balance sheets for the firms.
  • Listing gives employees who own ESOPs liquidity as well as an exit path for private equity investors. Meaningful Schemes are channelized by SME Listing. Good corporate governance is a prerequisite for listing, and this leads to the company’s sustainability.
  • Listing also helps generate an independent valuation of the company by the market.
  • Listing raises a company’s public profile with customers, suppliers, investors, financial institutions and the media.
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Challenges and risks of SME IPOs

While SME IPOs offer several benefits, they also come with challenges and risks. Some of the common challenges faced by SMEs during the IPO process include:

  1. Cost: The cost of going public can be substantial, including fees for underwriting, legal, and accounting services.
  2. Time-consuming: The IPO process can be time-consuming, requiring significant resources and attention from management.
  3. Market volatility: The performance of an IPO can be affected by market volatility, which can impact the valuation of the company.
  4. Regulatory compliance: An SME must comply with all applicable securities laws and regulations, which can be complex and time-consuming.
  5. Liquidity risk: It may be more difficult for investors to buy or sell shares of SMEs than it is for larger, more established companies because SMEs’ shares are less liquid.

Tips for SMEs considering an IPO

Before going public, SMEs should consider the following factors:

  1. Timing: An IPO’s timing is very important. The business should have a solid performance history and be financially secure.
  2. Valuation – The company should be valued appropriately, taking into account its financial performance, growth prospects, and market conditions.
  3. Best practices: When getting ready for an IPO, SMEs should adhere to best practices, which include creating a thorough business plan, assembling a capable management team, and putting in place sound governance procedures.

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SME listing process – How it works

Now let’s examine the SME listing procedure. The correct experts must be hired by SMEs to handle the deluge of paperwork and other compliance requirements for issuing an IPO. The following are the procedures that private SMEs need to follow in order to go public.

1.Appoint an underwriter

Selecting a merchant banker is the first step in initiating the initial public offering (IPO) process. An underwriter, another name for a merchant banker, is a specialist in market expectations. Drafting the IPO-related documentation, which includes information about the face value and selling price of the shares, is the responsibility of the underwriters. The designated banks are required to carry out due diligence in order to guarantee that the data supplied by the SME is precise and error-free.

2.Prepare the DRHP

Before your company goes public, the potential investors prefer to access the company’s information, i.e., operations and prospects. The underwriter creates a document called the Draft Red Herring Prospectus (DRHP). The DRHP allows potential investors to analyse the company’s financial data and conduct a market evaluation to make informed investment decisions.

3.Submit the DRHP

When companies file a regular IPO, they submit the DRHP to the Securities and Exchange Board of India (SEBI). However, SMEs must submit and get the DRHP verified by the Stock Exchange.

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4.Advertise the IPO and announce the launch date

Once the Stock Exchange approves the draft, the underwriters add the IPO opening and closing dates, IPO issue price, etc., and launch the IPO on a predetermined date. At this point in time, only the underwriters, banks, and stock exchange have information about the company’s plan to go public. Therefore, the next step is advertising and marketing the new IPO to attract public investors.

5.Launch the IPO and allot the shares

The last step is to launch the IPO on the opening date. Investors can subscribe to a minimum lot of shares before the closing date. The allotment stage comes after the closing date, where a select number of investors are allotted the shares.

After the IPO is officially launched in the primary market and the company allots the shares to the investors, the company becomes a public company. At this point, other investors can buy its shares in the secondary market.

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SME IPOs are an important tool for NSE SMEs to access public capital and grow their businesses. While new SME IPOs come with risks and challenges, SMEs can successfully navigate the process by following best practices and evaluating their readiness carefully. As SMEs continue to play a crucial role in the economy, SME IPOs will continue to be an essential tool for their growth and development.

Disclaimer: The article or blog or post (by whatever name) in this website is based on the writer’s personal views and interpretation of Act. The writer does not accept any liabilities for any loss or damage of any kind arising out of information and for any actions taken in reliance thereon.Also, and its members do not accept any liability, obligation or responsibility for author’s article and understanding of user.



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