Exploring SME IPOs: Definition, Application Process, and Market Insights
Small and medium-sized enterprises (SMEs) play a vital role in the economy, and SME IPO can be an essential tool for them to access capital and increase visibility. In this blog, we will provide a comprehensive overview of SME IPOs, including what they are, how they work, and why they matter.
What is SME IPO?
The SME full form in the stock market is Small and medium-sized enterprises. These refer to a business that falls within a certain size range in terms of employees, revenue, or assets. Generally, smaller-scale businesses, compared to larger corporations, may vary in their specific criteria for classification as an SME by country.
| Classification | Investment Amount | Turnover Amount |
|---|---|---|
| Small Enterprise | 1 crore – 10 crore | 5 crore – 50 crore |
| Large Enterprise | 10 crore – 20 crore | 50 crore -100 crore |
However, limited access to capital can be a primary hurdle confronting SMEs. To address this issue, they frequently opt for an SME IPO to secure funding from the stock market.
What is SME IPO Meaning?
SME IPO full form is Small and Medium-Sized Enterprises Initial Public Offering. SMEs make this offering to raise capital by selling shares to the public. These offerings are regulated by stock markets and are designed to meet the specific needs of SMEs. While a normal or mainboard IPO requires the company to adhere to specific guidelines regarding the size of the company, SME IPOs have more relaxed guidelines, enabling even smaller companies to directly access capital from the public in the stock market.
SMEs account for a significant portion of economic activity, particularly in emerging markets. They are often more nimble and innovative than larger companies, driving competition and productivity growth. SMEs also create jobs, supporting local communities and reducing unemployment.
SME IPO – Eligibility Criteria
To be eligible for issuing IPOs and obtaining a listing on the exchange, SMEs must fulfil the following SME IPO criteria:
- The SME must be incorporated under the Companies Act, 1956.
- The face value (post-issue paid-up capital) of the SME should not exceed Rs. 25 Crore.
- Valuation should assess the net tangible assets of the SME at Rs. 1.5 Crore.
- If the conversion of partnership/proprietorship/LLP firms established the SME, it must have a minimum track record of three years.
- The SME is required to have a functioning website.
- The promoters of the company should remain unchanged for a period of at least one year following the filing of the IPO.
- The SME must be willing to engage in the trading of Demat securities.
- The depositories expect the SME to enter into a contractual agreement.
Features of SME IPOs
To list and trade stocks on an SME platform, an SME must declare an IPO through an exchange. The post-issue paid-up capital of the SME must not surpass Rs. 25 crore. Thus, the eligibility criteria for directors, promoters, and investors involved in SME IPOs are consistent with those for regular IPOs. Therefore, these individuals are not defaulters, offenders, or disqualified from accessing the capital markets.
Features of SME IPOs
To list and trade stocks on an SME platform, an SME must declare an IPO through an exchange. The post-issue paid-up capital of the SME must not surpass ₹25 crore. Thus, the eligibility criteria for directors, promoters, and investors involved in SME IPOs are consistent with those for regular IPOs. Therefore, these individuals are not defaulters, offenders, or disqualified from accessing the capital markets.
SME IPO Exchanges: Where Are They Listed?
In the year 2012, the NSE and BSE jointly inaugurated two exchanges dedicated to the listing of SME IPOs. These are:
- The BSE SME platform operated by the Bombay Stock Exchange
- NSE EMERGE managed by the National Stock Exchange
Requirements for SME IPOs to go Public
SEBI Guidelines
- Minimum Issue Size: Rs. 10 crores and a maximum of Rs. 25 crores.
- Min No. of members for Issue – 50
- Minimum post-issue paid-up capital: Rs. 10 crore (higher than SEBI’s Rs. 3 crore requirement).
- Minimum number of trading members: 25
- Minimum Application Value: Rs. 1 lakh for retail investors and Rs. 5 lakh for non-retail investors.
- Lock-in Period: Promoters’ shares are subject to a lock-in period of 3 years from the date of listing.
- Track Record: At least 3 years of operations for the company or its promoters
- The SME cannot reapply for an IPO for a minimum period of six months if we reject the application. Additionally, the minimum application and trading lot size must not fall below Rs. 1 lakh.
BSE Guidelines
- Net Tangible assets of at least Rs. 3 crores as per the latest audited financial results
- Net worth (excluding revaluation reserves) of at least Rs. 3 crores as per the latest audited financial results.
- Track record of distributable profits in terms of sec. 123 of the Companies Act, 2013 for at least two years out of immediately preceding three financial years and each financial year has to be at least 12 months. Extraordinary income will not be considered for calculating distributable profits OR Net worth shall be at least Rs. 5 crores.
- The post-issue paid-up capital of the company shall be at least Rs.3 crores.
SME IPO Listing Process
Listing your SME on a stock exchange can be a great way to raise capital and boost your company’s profile. Here’s a breakdown of the SME IPO listing process:
Apply an Underwriter
Initiating the IPO process involves appointing a merchant banker, commonly known as an underwriter. This professional possesses expertise in market dynamics and can play a pivotal role in drafting IPO-related documents, including details about the face value and selling price of shares. Thus, the appointed underwriter ensures the accuracy and integrity of the data provided by the SME.
Prepare the DRHP
Before a company goes public, potential investors seek comprehensive information about its operations and prospects. Therefore, the underwriter creates a Draft Red Herring Prospectus (DRHP), allowing potential investors to analyze the company’s financial data and conduct market evaluations for informed investment decisions.
Submit the DRHP
In the case of a regular IPO, companies submit the DRHP to the Securities and Exchange Board of India (SEBI). However, the Stock Exchange requires SMEs to submit and verify the DRHP.
Advertise the IPO and Announce the Launch Date
Upon approval of the draft by the Stock Exchange, the underwriters add details such as IPO opening and closing dates, issue price, etc., and launch the IPO on a predetermined date. Therefore, underwriters, banks, and the stock exchange only know information about the company’s plan to go public at this stage.
Launch the IPO and Allot Shares
The final step is to launch the IPO on the opening date, allowing investors to subscribe to a minimum lot of shares before the closing date. After the closing date, a selected number of investors are assigned the shares during the allotment process.
Once the company officially launches the IPO in the primary market and allocates shares to investors, it attains public status. Subsequently, other investors can purchase its shares in the secondary market.
What is the Difference Between IPO and SME IPO?
SME IPOs differ from regular IPOs in several key ways, including the listing criteria, disclosure requirements, and the role of merchant bankers. SME IPOs are initial public offerings (IPOs) designed for SMEs. Here are the key differences between SME IPOs and regular IPOs:
| SME IPOs | Regular IPOs |
|---|---|
| Target SMEs | Target larger companies |
| Fewer regulatory requirements | Stringent regulatory requirements |
| Simplified disclosure and compliance rules | Complex disclosure and compliance rules |
| Less expensive and time-consuming | More expensive and time-consuming |
| Limited market liquidity | Higher market liquidity |
| Aimed at retail investors | Aimed at institutional investors. |
| Listed on the NSE SME Exchange in India | Listed on NSE and BSE |
How Does SME IPO Work?
The process of issuing new SME IPOs is similar to that of regular IPOs, but with some differences.
| Procedure | Timeline |
| Conversion of Company into Public Limited Company, if applicable | X |
| Preparation of Documents for conversion and submission to ROC for approval i.e. Alteration of Memorandum, Articles & filing of necessary forms for appointment of aforesaid directors | X+5 |
| ROC approval accorded for conversion | X+7 |
| Identification & appointment of Registrar & Transfer Agents & Submission of Master Creation forms with NSDL, CDSL for establishing connectivity | X+7 |
| Appointment of Managing Director, Whole Time Director, Independent Directors, Company Secretary & deciding about their remuneration, sitting fees etc. | X+12 |
| Constitution of committees – Audit, Shareholder Grievance, Remuneration etc. As per SEBI Listing Obligations and Disclosure Requirements Regulations | X+15 |
| Preparation of website of the Company & hosting code of conduct on the website | X+18 |
| Signing of Tri-Partite Agreement with NSDL & CDSL and receipt of ISIN | X+18 |
| Identification & appointment of peer review auditors & getting the financials of the last 5 years restated and for the last 1 year re-audited from peer review auditors as per SEBI (ICDR) Regulations, 2009 | X+18 |
| Appointment of Merchant Banker & Market Maker | X+18 |
| Preparation of Project Report and Draft Red Herring Prospectus (DRHP) / Prospectus | X+35 |
| Filing of Draft Red Herring Prospectus (DRHP) with stock exchange & SEBI (only for hosting) | X+35 |
| Visit to the registered office of the Company by BSE officials and promoters interview with Listing Advisory Committee | X+55 |
| In Principle approval from the stock exchange | X+65 |
| Filing of Draft Red Herring Prospectus (DRHP) with ROC & getting it cleared from ROC | X+70 |
| Filing of Final Prospectus with Stock Exchange and SEBI | X+75 |
| Opening of the Issue | X+80 |
| Closing of the Issue | X+83 |
| Allotment of shares | X+90 |
| Filing of listing application with the Stock exchange | X+93 |
| Receipt of listing approval from the Stock exchange | X+95 |
| Filing of corporate action form with NSDL & CDSL and demat credit of shares | X+96 |
| Filing of trading application with the Stock exchange | X+98 |
| Receipt of trading approval from Stock exchange | X+100 |
How do Companies Benefit from SME IPO?
Small and Medium Enterprises (SMEs) can derive significant benefits from launching an Initial Public Offering (IPO) on an SME exchange. These platforms are specifically tailored to the needs and scale of smaller companies, facilitating their growth and enhancing visibility. Here’s how SMEs benefit from IPOs:
1. Capital Access
The most immediate benefit of an SME IPO is access to capital. By going public, SMEs can raise funds from a broader investor base, providing the necessary capital to expand operations, invest in new technology, reduce debt, or enhance working capital. This infusion of funds is crucial for growth and competitive advantage.
2. Market Credibility and Visibility
Listing on a stock exchange enhances an SME’s visibility and credibility. This increased recognition can attract more business opportunities, including partnerships and contracts, as stakeholders perceive listed companies as more reliable and stable compared to their unlisted counterparts.
3. Exit Strategy for Existing Investors
An IPO provides an excellent exit route for early-stage investors and founders looking to realise some gains from their investment. It offers liquidity, allowing them to sell part or all of their stake at a market-driven price.
4. Employee Incentives
SMEs can use stock options as a strategic tool to attract and retain talent. Offering shares to employees aligns their interests with the company’s success and can be an effective motivational tool that encourages loyalty and dedication.
5. Valuation and Access to Cheaper Capital
Publicly traded companies often enjoy higher valuations than their private counterparts. A higher valuation can lead to cheaper capital costs when raising debt, as the company’s equity is seen as more valuable as collateral.
6. Improved Corporate Governance
Listing on an exchange requires SMEs to adhere to stricter corporate governance norms, financial disclosures, and transparency standards. This can help improve management practices, attract seasoned professionals to the board, and enhance overall governance.
7. Facilitating Acquisitions
With access to equity markets, SMEs can use their publicly traded stock as a currency for acquisitions. This can be an efficient way to grow and expand into new markets or segments without the need to raise additional debt.
8. Market Discipline
Being a public entity subjects the SME to market scrutiny, which can enforce fiscal discipline and efficiency. Regular audits, mandatory disclosures, and the need to meet shareholder expectations can lead to better decision-making and operational efficiencies.
9. Brand Building
An IPO helps in brand building. As the company gains media coverage and analyst attention, it can leverage this exposure to enhance its brand presence in the market, attracting more customers and business opportunities.
How to Invest in SME IPOs?
Here’s how you can invest in an SME IPO:
1. Eligibility:
- Ensure you have a Demat account (contact your bank or preferred broker to open one if needed).
- Check the minimum application value of the specific IPO (usually Rs. 1 lakh for retail investors).
2. Platform:
- Access the IPO application through your broker’s online platform or mobile app.
- Some platforms might offer direct access to SME exchanges like BSE SME or NSE Emerge.
3. Application Process:
- Select the “SME IPO” section and find the specific IPO you’re interested in.
- Enter the number of lots (each lot represents a specific number of shares) you want to apply for.
- Double-check the details and confirm your application.
- You’ll need to make an upfront payment through your linked bank account (typically via UPI).
4. Allotment and Trading:
- Once the IPO closes, allotment results are announced. You’ll receive shares based on your application and available shares.
- If allotted, the shares will be credited to your Demat account. You can then hold them or sell them on the SME exchange through your broker.
However, this is a standard step-by-step guide. As always, it’s advisable that investors do their own research and/or consult their financial advisor before investing.
Impact of SME IPO
Many emerging businesses face the challenge of securing capital for their expansion. While larger startups can explore various avenues, such as engaging with private equity investors to access additional funds, smaller enterprises have fewer alternatives. A dedicated platform tailored for such companies could prove beneficial for both these businesses and potential investors.
Additionally, the growing interest in investing in SMEs can be attributed to the expanding pool of SME stocks and higher returns. The encouraging backing from both the exchange board and investors can suggest a favourable environment for SME-IPOs in the Indian market. These SMEs may hold significance for the nation’s growth and contribute to increased employment opportunities in India.
Upcoming SME IPOs List
The new SME IPO list for 2023 has been listed below.
| Issuer Company | Open Date | Close Date | Listing Date | Issue Price (in Cr) | Issue Size (Rs Cr.) | Lot Size | Exchange |
|---|---|---|---|---|---|---|---|
| Emmforce Autotech Limited IPO | Apr 23, 2024 | Apr 25, 2024 | Apr 30, 2024 | 93.00 to 98.00 | 53.9 | 1,200 | BSE SME |
| Shivam Chemicals Limited IPO | Apr 23, 2024 | Apr 25, 2024 | Apr 30, 2024 | 44 | 20.18 | 3,000 | BSE SME |
| Varyaa Creations Limited IPO | Apr 22, 2024 | Apr 25, 2024 | Apr 30, 2024 | 150 | 20.1 | 1,000 | BSE SME |
Disclaimer: Please note that the above list is for educational purposes only, and is not recommendatory. Please do your own research or consult your financial advisor before investing.
Note: The data on the upcoming SME IPO list in India in the list is from 22nd December 2023. However, for real-time updates on stock prices and market trends, visit the smallcase stocks collection today!
Advantages of SME IPO
SME IPO can provide several benefits to a small or medium-sized company. Some of these benefits include:
- Access to Capital: By going public, SMEs can access a broader pool of capital than through traditional bank loans or private equity.
- Increased Visibility: A public listing can help an SME increase its visibility and reputation in the market.
- Liquidity: Stock exchanges can provide liquidity to shareholders by trading the shares of a public company.
- Valuation: A public listing can increase the valuation of a company, making it more attractive to potential investors or buyers.
- Employee Incentives: A public listing can provide a platform for offering employee incentives such as stock options or performance-based bonuses.
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:
- Cost: The cost of going public can be substantial, including fees for underwriting, legal, and accounting services.
- Time-Consuming: The IPO SME process can be a bit time-consuming, requiring significant resources and attention from management.
- Market Volatility: The performance of an IPO can be affected by market volatility, therefore, this can impact the valuation of the company.
- Regulatory Compliance: An SME must comply with all applicable securities laws and regulations, which can be complex and time-consuming.
- Liquidity Risk: Shares of SMEs may not be as liquid as those of larger, more established companies, which can make it difficult for investors to buy or sell shares.
Tips for SMEs Considering an IPO
Before going public, SMEs should consider the following factors:
- Timing: The timing of an IPO is crucial. The company should be financially stable, with a strong track record of performance.
- Valuation: Appropriately value the company, considering its financial performance, growth prospects, and market conditions.
- Best Practices: SMEs should follow best practices when preparing for an IPO. Including developing a comprehensive business plan, building a strong management team, and establishing good governance practices.
- Set Realistic Expectations: Don’t overestimate the immediate financial gains or expect overnight success. Thus, it’s advisable to focus on long-term value creation and sustainable growth.
- Build a Strong Investor Relations Strategy: Build trust with investors by providing regular updates and ensuring accessible information.
To Wrap It Up…
In conclusion, SME IPOs can be 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 SME IPO process. Following best practices and carefully evaluating their readiness can accomplish this. 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.
FAQs
Investing in an SME IPO involves a blend of high risks and potential high rewards. These opportunities come with higher volatility and less predictability due to the companies’ smaller size and lesser regulatory scrutiny. While SME IPOs can offer substantial growth, they require thorough research and cautious investment due to their less stable market presence and lower liquidity. Investors should assess their risk tolerance and possibly seek professional advice to navigate these investments wisely.
The SME market meaning is the segment of the economy focused on small and medium-sized enterprises. These are typically businesses with fewer than 250 employees and limited access to traditional funding sources like bank loans.
SME full form in IPO is an IPO specifically meant for SMEs. It may provide them with an alternative way to raise capital compared to traditional methods.
Once shares are credited to your Demat account after the IPO allotment, you can sell them through your broker on the SME exchange where they are listed. However, be aware of the lower liquidity in SME markets, meaning it might take longer to find buyers at your desired price compared to bigger stocks.
1. Open Demat account
2. Access the IPO platform on the broker’s site or exchange.
3. Choose the desired SME IPO and enter several lots.
4. Confirm and pay through UPI. Shares land in Demat after allotment.
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