What is SME IPO?

If you are an investor or in any way associated with the Indian stock market, you may have heard about the IPO buzz doing rounds almost every week. The Indian stock exchange has provided substantial returns to investors who have applied to various good IPOs. However, if you are new to the investing segment and want to kick-start your investing journey, applying to a high-potential IPO can be a great first step.

An Initial Public Offering (IPO) allows companies to raise funds by selling shares to the public, making investors part-owners. Companies must register with SEBI and appoint underwriters before launching an IPO. After SEBI’s approval, shares are listed on the NSE and BSE. Small companies can also raise funds through a specialized process called IPO SME , designed to meet their needs.

What are SMEs and SME IPOs?

SMEs are small and medium enterprises with lower revenues, employees, and investments compared to large firms. They are the backbone of economic growth and employment generation. An IPO SME is an opportunity for these small companies to raise funds by issuing shares to the public. They can expand their businesses in compliance with regulations that suit their size.

Just like any other company issues an IPO to raise funds, SME IPOs are meant to raise capital for small and medium enterprise companies. As SMEs are considerably smaller than other companies, the SME IPO is smaller in issue size than a regular company’s IPO. Due to the size of the enterprise, the SME companies, after their IPO, are not listed on the Bombay Stock Exchange or the National Stock Exchange.

SME IPO Exchanges: Where are they listed?

In 2012, the NSE and BSE opened two exchanges to list SME IPOs. These are:

• BSE SME platform by the Bombay Stock Exchange
• NSE EMERGE by the National Stock Exchange

Listing Criteria for SME IPO

1. Public Shareholding

To conduct an IPO SME, shares up to 25% are to be issued to the public. This ensures good public participation and liquidity in the market.

2. Minimum Subscribers

A minimum of 50 investors are to be registered for SME IPOs. This helps broaden the share distribution and dilutes the risk of any manipulation in the market.

3. Minimum Trading Lot

The minimum trading lot for an SME IPO has been kept at Rs 1 lakh. This larger lot has been kept to attract serious long-term investors rather than speculative traders.

4. Underwriting 

The SME IPOs must be 100% underwritten. In this, the entire issue has to be bought in case it does not sell out. Of this, 15% must be underwritten by merchant bankers in their accounts.

5. Market Making

The market makers must be registered with the Exchange. It is the demand from SEBI to ensure there is liquidity. These market makers will have to operationalize their business for more than three years in regular selling and purchasing so as to maintain their trade actively.

6. Offer Document

Offer Documents submitted with SEBI do not go through observation requirements. This streamlined procedure does not add as many hassle-bumps in raising issues to SMEs going listed.

7. Post-issue Paid-up Capital  

The paid-up capital after the issue should not exceed Rs 25 crore. This means that only truly small and medium-sized companies are eligible to raise funds through an SME IPO.

8. Track Record and Financials  

An SME needs to have a credible track record, which can be in terms of financial performance and profitability for it to be eligible to raise funds through an IPO. This builds trust and ensures that only viable companies access the market.

How to Invest in an SME IPO?

Investing in an IPO SME can be a pretty simple affair. First, you require a Demat account. This is because holding shares electronically is only possible when you have a Demat account. Then, there is a need to research the available SME IPOs for subscription on stock exchanges like NSE Emerge or BSE SME.

The DRHP is a source of all relevant information about the company-  from the health of its finances to strategy and other risk-related matters. Having finalized the IPO, now invest through your online trading account. Just open the application for IPOs by using your trading account, and once you get onto the page for applying to IPOs, key in the number of shares you’d like to invest in.

After closing the IPO, if you receive shares, they will be credited to your Demat account. Just note the IPO launch date and listing date, too, so that you don’t miss making decisions on time.

Features of SME IPOs

• Easy Compliance: There is relatively reduced regulatory compliance required for SME IPOs. Hence, it becomes convenient for smaller companies to get listed on the stock exchange.
• Enhanced Market Visibility: Listing improves the SMEs’ market visibility, thus increasing the credibility of investors, customers, and partners.
• Institutional Backing: The regulatory institutions favour SMEs in most instances, thus making the listing process relatively easy.
• Increased Retail Involvement: The IPO SMEs attract more retail investors because of the small application amounts, thus enabling wider participation in the market.
• Growth Funding: SME IPOs are also a source of financing expansion, research, and development, or debt pay-off.

SME Listing Process – How It Works

• Appointment of Underwriter: First, appoint an underwriter who helps determine the IPO price and underwrites the issue.
• Draft Red Herring Prospectus (DRHP): It contains the company’s business and financial information, including the issue’s details.
• Make a Regulatory Submission: Get the DRHP ready. Then, file and submit it to SEBI.
• Get Regulatory Approval: Await the nod from SEBI, which declares that the company complies with the listing requirements.
• Market the IPO: Advertise the launching of the IPO through all media channels so that awareness in the minds of the prospective investors is there.
• Decide the IPO SME price: The final offering price is determined usually through book-building.
• Opening and Allotment: Open IPO for subscriptions, allot shares in proportion to the demand from the investors, and credit shares to demat accounts.
• Listing at Stock Exchange: After allotment, list the shares at the stock exchange, and trading can be done.

Difference Between Mainboard IPO and SME IPO

IPO SME Comparison Aspect	Mainboard IPO	SME IPO
Type of Companies	Major corporations	Small and medium-sized enterprises
Regulatory Requirements	High compliance standards	More lenient and tailored regulations
Minimum Investment	Larger investment thresholds	Smaller investment thresholds
Investment Size	Substantial application amounts	More accessible application amounts
Market Visibility	Extensive market presence	Targeted visibility within the SME sector

Impact of SME IPOs

IPO SMEs constitute an essential part of the financial system as it enables access to the capital market for small and medium-sized enterprises. This capital inflow enables the SMEs to expand their scale and facilitate the overall economy’s growth. Smaller companies also generate more diverse markets and investment opportunities for the shareholders through access to newer and possibly better- earning businesses.

Listings raise the credibility and publicity of small-scale enterprises and give chances for strategic collaborations and further business growth. In the long run, this boosts the health of the SME sector and promotes the dynamism of the stock market, thus making the investment environment more inclusive.

Frequently Asked Questions

How do companies benefit from SME IPOs?

Every company, big or small, needs funds to operate and expand. SMEs, too, need such funds, which they can raise through the issuance of an SME IPO. It allows them to fund their operations, reduce debt and expand as per their organisational plans.

Is SME-IPO good for investment?

There are always risks in applying to IPOs, and you should always research the company prior to applying to their SME IPO. However, SME IPOs can provide good returns if they have high growth potential and are fundamentally strong.

Is it good to invest in SME IPO?

Investing in IPO SMEs can offer high growth potential and diversification, but they also carry significant risks due to limited track records and market volatility. Investors should conduct thorough research before investing.

What is the risk of SME IPO?

The risks of IPO SMEs include high volatility, lack of liquidity, and limited financial history. Many SMEs may not have stable earnings or established business models, increasing the likelihood of investment loss.

Who is eligible for SME IPO?

To be eligible for an IPO SME, a company must have a positive net worth, a track record of at least three years, and post-issue paid-up capital not exceeding ₹25 crores. Specific financial criteria apply as well.