What is an SME IPO?

Small and medium-sized enterprises (SMEs) are one of the lifelines of the Indian economy. Their contribution to the nation’s growth has been immense. However, despite being a growth engine, many SMEs find it tough to gain access to capital. In a bid to make it easier for such entities to raise funds, the Indian stock exchanges, along with the Securities and Exchange Board of India (SEBI), launched IPOs for SMEs in 2012. Here’s a comprehensive overview of what such an IPO entails.

An SME IPO is the process through which small and medium-sized enterprises issue their shares to the public for the first time in exchange for funds. The issue size of an SME IPO is usually very small compared to regular IPOs.

Small and medium-sized enterprises with post-issue capital not exceeding ₹25 crores are eligible to issue their shares to the public via an SME IPO. The shares of such companies are listed on dedicated SME platforms such as the Bombay Stock Exchange’s SME platform or the National Stock Exchange’s Emerge SME platform.

SME IPO – Eligibility Criteria

To be eligible for an SME IPO, a company must meet several criteria set by the BSE and NSE under the guidelines of the Securities and Exchange Board of India (SEBI). Here's a summary of the eligibility criteria for listing an IPO SME on these platforms:

• Incorporation:

  The company must be incorporated under the Companies Act, 1956.

• Post-Issue Paid-up Capital:

  This should not exceed ₹25 crore.

• Net Tangible Assets:

  At least ₹3 crore, reflecting the company’s financial health.

• Track Record:

  The company should have a proven track record of at least three years, or if the company has been operational for less than three years, it must be project funded by recognized financial institutions like NABARD or SIDBI.

• Profitability:

  The company must demonstrate profitability with positive earnings before interest, depreciation, and tax (EBIDT) from operations for at least two out of the three financial years preceding the application.

• Leverage Ratio:

  A maximum leverage ratio of 3:1 is allowed, though finance companies may receive an exemption.

• No Default:

  The company should not have defaulted in the repayment of debts to its creditors.

• Regulatory Compliance:

  There must be no material regulatory or disciplinary action against the company or its promoters by any regulatory authority or stock exchange in the past three years.

• Mandatory Trading in Demat Form:

  Companies must facilitate trading of their shares in demat form and enter agreements with depositories like CDSL and NSDL.

• Website Requirement:

  The company must maintain a corporate website as part of its transparency and information dissemination practices.

For additional specific requirements, such as those applicable to broking companies or microfinance companies, there are enhanced criteria regarding minimum net worth, assets under management, and client base

These eligibility criteria ensure that only financially stable and compliant SMEs can access public markets, helping to protect investors and add quality stocks to the exchanges.

Features of SME IPOs

Now that you know what SME IPO means, let’s take a quick glimpse at a few of its key features.

• Relaxed Eligibility Criteria

  For a small and medium-sized enterprise to opt for an IPO it must possess a net tangible asset of at least ₹3 crores, a net worth of at least ₹1 crore, and an average operating profit of ₹15 crores. Additionally, the SME must have an operational track record of a minimum of 3 years and must be able to show operating profits and positive net worth for the previous three financial years.

• Lot Size

  According to the guidelines set by the SEBI, the minimum lot size for SME IPOs should be within the range of 100 to 10,000.

• Other Prerequisites

  Disciplinary action should not have been initiated against the company, directors, promoters, or investors. Also, the promoters should hold at least 20% of equity capital post the IPO.

How Does SME IPO Listing Work?

Here’s a short overview of the typical process that a small and medium-sized enterprise must follow to get its shares listed.

• Firstly, the company has to appoint a merchant banker. The merchant banker is an entity that works closely with the company to ensure that the IPO is managed professionally.
• Once appointed, the merchant banker then compiles all the key data as part of an extensive compliance and due diligence activity. This includes both financial and corporate governance data.
• The merchant banker then prepares the prospectus, which is a detailed document containing extensive information about the company. It contains information on the company’s financials, business, strengths and risks, details of the IPO, and more.
• The prospectus is then filed with the SEBI and the stock exchange for verification and approval.
• After carefully examining the prospectus and other associated documents for authenticity, SEBI and stock exchanges provide an in-principle approval for the IPO.
• Once the in-principle approval is received, the company may then open its issue for subscription, provided it satisfies all the other laid-out conditions.
• After the subscription period expires, the company, along with the merchant banker, proceeds to allot the shares to eligible investors.
• A few days after allotment, the company’s shares are listed on the exchange and can be freely traded by investors.

SME IPO Exchanges: Where Are They Listed?

In India, Small and Medium Enterprises (SMEs) looking to raise capital through an Initial Public Offering (IPO) can list their shares on two dedicated platforms: the BSE SME and the NSE EMERGE.

• BSE SME:

  This platform was launched by the Bombay Stock Exchange (BSE) to offer SMEs a gateway to raise equity capital for growth and expansion. It supports SMEs by providing an investor-friendly environment, which helps them list and trade their shares similarly to the larger corporations on the main exchanges.

• NSE EMERGE:

  This platform is managed by the National Stock Exchange (NSE). It specifically caters to SMEs, facilitating them to not only access capital markets but also to enhance their visibility and credibility in the market. NSE EMERGE aims to support the growth of these enterprises through easier access to public financing.

Both platforms are regulated and designed to accommodate the unique needs of SMEs, providing a structured and compliant environment for them to list and trade their shares. These platforms enable SMEs to expand their investor base and achieve greater scalability.

Difference Between an SME IPO and a Mainboard IPO

Initial Public Offerings are classified into two types - Mainboard IPO and SME IPO - based on the entity issuing them. Although the aim of the IPO remains the same, there are several significant differences between these two kinds of public issues. Here’s a quick overview of a few key differences.

Impact of an SME IPO

The launch of the SME IPO in 2012 created a profound positive impact on small and medium-sized enterprises. Companies that were erstwhile finding it difficult to raise funds can now do it effortlessly from the public. Unlike mainboard IPOs, SMEs wanting to raise funds don’t have to jump through several legal hoops to gain access to funds. The relaxed eligibility criteria ensure that almost all profitable enterprises have unfettered access to capital.

The launch of SME IPOs has also led to better transparency, accountability and governance on the part of the companies. And for investors, many of the IPOs of SMEs have gone on to deliver stellar returns, becoming primary wealth creators.

How to Invest in SME IPOs?

Investing in SME IPOs in India involves a few steps, which can be managed through various platforms like stockbrokers and banks. Here’s how you can start:

• Open a Demat Account:

  First, you'll need a Demat account, which is mandatory for trading and investing in stocks in India.

• Select an IPO:

  Look for upcoming SME IPOs listed on platforms like BSE SME or NSE EMERGE. Information about these can usually be found on financial news websites, broker websites, and platforms.

• Application Process:

  Apply for the IPO using the ASBA (Application Supported by Blocked Amount) facility or through UPI-based applications provided by brokers. You can fill out the application online through your bank or broker’s portal.

• Bid:

  Enter the number of lots and the bid price within the price band specified for the IPO.

• Review and Submit:

  Double-check your application details, then submit and wait for the allotment.

Read Also: Learn all about Initial Public Offering (IPO)

Read Also: Types of IPO

Read Also: How to apply for an IPO online?

Advantages of SME IPO

Investing in SME IPOs offers several benefits:

• Potential for High Returns:

  SME IPOs can provide high returns if the company grows. These returns might be higher compared to established large-cap companies because SMEs have more room to expand and grow.

• Portfolio Diversification:

  Adding SME stocks can diversify your investment portfolio, spreading out potential risks associated with market fluctuations.

• Price Discovery:

  Investing in an IPO allows investors to get in at the ground level, potentially buying at an initial price that could be lower than future market prices if the company succeeds.

• Lower Investment Threshold:

  Compared to main-board IPOs, SME IPOs often require a smaller capital outlay, making it easier for individual investors to participate.

Always remember, investing in SME IPOs carries its own risks as these companies are typically smaller and can be more volatile. It’s important to conduct thorough due diligence or consult financial advisors to understand the specific risks and potential of the SME you are interested in.

Conclusion

With this, you must now be aware of the meaning of SME IPO, its various features and the kind of impact it has left. The number of SMEs going for IPOs has been steadily on the rise, with the momentum likely to hold steady in the future.

If you have any plans of investing in SME IPOs, make sure to first open an m. Stock trading and Demat account. With m.Stock, you get to enjoy zero brokerage trades for life across multiple segments. That’s not all. m.Stock also offers a robust, stable and fast platform that allows you to apply for IPOs with just a single click.