sme ipo

The landscape of Initial Public Offerings (IPOs) has shifted significantly in recent years, with small and medium-sized enterprises (SMEs) emerging as key players in the IPO market. IPOs were traditionally thought to be the domain of large corporations, but the concept of SME IPOs has opened up new avenues for smaller businesses to raise capital, expand operations, and unlock growth opportunities.


What is SME IPOs?

SME IPOs refer to the process by which small and medium-sized businesses first offer their shares to the public. This enables them to raise market capital and become a publicly traded company. SME IPOs are typically appropriate for companies with strong growth potential, a strong business model, and a clear plan for using the funds raised to expand operations.

Benefits of SME IPOs

  1. Access to Capital: One of the primary advantages of SME IPOs is the ability to raise significant capital for business expansion, research and development, marketing, and other growth initiatives. This influx of funds can fuel innovation, strengthen the company’s financial position, and enable it to seize new opportunities.
  3. Enhanced Visibility and Credibility: Going public through an SME IPO brings greater visibility and credibility to a company. It elevates its profile in the market, attracts potential investors, and fosters confidence among stakeholders, including customers, suppliers, and business partners.
  5. Liquidity for Existing Shareholders: SME IPOs offer an opportunity for existing shareholders, including founders and early investors, to monetize their investments and achieve liquidity. This can be an attractive proposition for shareholders seeking to diversify their holdings or exit the business.
  7. Employee Incentives and Talent Attraction: Going public can enable companies to design and implement employee stock ownership plans (ESOPs), allowing employees to become shareholders and align their interests with the company’s long-term success. This can attract and retain top talent by providing them with an opportunity to participate in the company’s growth and success.

SEBI Regulations for SME IPOs

Role of SEBI in Regulating IPOs

  1. Approval and Oversight: SEBI approves and oversees IPOs to ensure compliance and transparency.

  2. Disclosure and Price Discovery: Mandates comprehensive disclosure and fair price discovery mechanisms.

  3. Investor Protection: Enforces regulations to protect investors from fraud and manipulation.

  4. Listing Guidelines and Intermediary Regulation: Sets listing standards and regulates intermediaries involved in the IPO process.

  5. Investor Education and Market Integrity: Actively educates investors and monitors market activities to maintain integrity.

  6. Continuous Monitoring and Policy Formulation: Monitors listed companies and regularly updates regulations for a robust IPO ecosystem.

SEBI’s Specialized Guidelines for SME IPOs

  1. Eligibility Criteria: Specifies eligibility criteria for SMEs to opt for an IPO.

  2. SME Exchange Listing: Facilitates listing on dedicated SME exchanges like BSE SME and NSE Emerge.

  3. Reduced Disclosure Requirements: Streamlines and reduces disclosure requirements compared to regular IPOs.

  4. Minimum Issue Size: Prescribes a lower minimum issue size for SME IPOs.

  5. Investor Lot Size: Defines a smaller lot size to make participation feasible for smaller investors.

  6. Promoter Contribution: Prescribes minimum promoter contribution to ensure financial commitment.

  7. Market Maker Mandate: Requires market makers to enhance liquidity in SME stocks post-listing.

  8. Lock-in Requirements: Specifies lock-in periods for promoters to ensure commitment and stability.

  9. Continuous Disclosure: Encourages continuous disclosure of material information post-listing.

  10. Post-IPO Monitoring: SEBI monitors SMEs post-IPO to ensure compliance with guidelines.

  11. Facilitation by Intermediaries: Intermediaries play a role in guiding and facilitating SMEs through the IPO process.

Eligibility Criteria for SMEs to List on SME Exchanges

  1. Company Age:
    The company must be in existence at least pre-adopted three years, regardless of whether it is a proprietary, partnership, private limited, public limited, or any firm.
  3. Company Profit:
    Out of three years, any one-year the company should have operating profit. It means, the company needs to be on a profitable operating basis in any one of the preceding three years.
  5. Net Tangible Asset:
    A company’s net tangible assets should be minimum 1.5 crores to become a listed company and to list its IPOs in the market. In addition to the net tangible assets. When the eligibility criteria are fulfilled, a team of experts will help you through the SME listing process.
  7. Paid Up Capital:
    As far as the company’s paid-up capital is concerned, if it wants to be listed as an SME IPO, the maximum post-issue paid-up capital should be 25 crores or less than 25 crores.

SME IPO Process

  1. 1. Appointment of Merchant Banker
    2. Capital Structuring, Due Diligence, and Pre-IPO preparation
    3. Appointment of Bankers, Registrar, Market Makers, RTA etc.
    4. Preparation of Offer Document (DRHP)
    5. Filing of DRHP with Stock Exchange
    6. Approval from Exchange
    7. Issue Pricing
    8. The Opening of Public Issue
    9. Closure of the Issue & Allocation of Shares
    10. Listing & Trading at the Exchange

Listing Requirements in BSE and NSE: A Comparative Analysis between SME Platform and Main Board

  • IPO Application Size:

    • BSE SME Platform: Not less than Rs 1 lakh
    • BSE Main Board: Rs 10,000 – 15,000 minimum
    • NSE SME Platform: Not less than Rs 1 lakh
    • NSE Main Board: Rs 5000 – Rs 7000
  • Post issue paid up capital (face value):

    • BSE SME Platform: Not more than Rs 25 crores
    • BSE Main Board: Minimum Rs 10 crores
    • NSE SME Platform: Less than Rs 25 crore
    • NSE Main Board: Not less than Rs 10 crore, and the capitalization of the applicant’s equity shall not be less than Rs.25 crores
  • Minimum pre-tax operating profit:

    • BSE SME Platform: No such requirement
    • BSE Main Board: At least Rs 15 crores for preceding three years
    • NSE SME Platform: At least three years. The company/entity should have positive cash accruals (earnings before depreciation and tax) from operations for at least 2 financial years preceding the application
    • NSE Main Board: Three years track record of positive net worth
  • IPO grading:

    • BSE SME Platform: Not mandatory
    • BSE Main Board: Mandatory
    • NSE SME Platform: Not mandatory
    • NSE Main Board: Mandatory
  • Market capitalisation/issue size:

    • BSE SME Platform: No restriction
    • BSE Main Board: No restriction
    • NSE SME Platform: No restriction
    • NSE Main Board: No restriction
  • IPO underwriting:

    • BSE SME Platform: 100 per cent (at least 15 per cent of the issue size on the book of the merchant banker)
    • BSE Main Board: Mandatory (not required when 75 per cent of the issue is offered for QIBs)
    • NSE SME Platform: 100 per cent (at least 15 per cent of the issue size on the book of the merchant banker)
    • NSE Main Board: Mandatory (not required when 75 per cent of the issue is offered for QIBs)
  • Minimum number of allottees in IPO:

    • BSE SME Platform: At least 50
    • BSE Main Board: At least 1000
    • NSE SME Platform: At least 50
    • NSE Main Board: At least 1000
    • NSE Main Board: By SEBI
  • Post issue reporting requirement:

    • BSE SME Platform: Half-yearly (abridged)
    • BSE Main Board: Quarterly (comprehensive)
    • NSE SME Platform: Half-yearly (abridged)
    • NSE Main Board: Quarterly (comprehensive)
  • Market making:

    • BSE SME Platform: Mandatory
    • BSE Main Board: Not mandatory
    • NSE SME Platform: Mandatory
    • NSE Main Board: Not mandatory
  • Vetting of DRHP:

    • BSE SME Platform: By the exchange
    • BSE Main Board: By SEBI
    • NSE SME Platform: By the exchange
  • Disclosures and Compliance


    Disclosure Requirements for SME IPOs as per SEBI Regulations

    SEBI mandates specific disclosure requirements for SME IPOs to ensure transparency and provide investors with the necessary information to make informed decisions. These disclosures cover various aspects of the company’s operations, financials, risks, and future prospects.


    Importance of Transparency and Accurate Financial Reporting

    Transparency and accurate financial reporting are critical for SMEs seeking to go public. Investors rely on the information provided in the prospectus and subsequent financial statements to assess the company’s performance and potential. Maintaining transparency and accuracy is essential for building trust with shareholders.


    Compliance Obligations of SMEs Post-Listing

    After successfully conducting an SME IPO, SMEs must continue to meet regulatory compliance obligations. This includes timely filing of financial reports, adherence to corporate governance norms, and compliance with market regulations. Non-compliance can have legal and financial repercussions.


    Challenges and Risks


    1. Market Volatility: Exposure to market fluctuations affecting IPO pricing.

    2. Limited Track Record: Investor skepticism due to a short operating history or limited profitability.

    3. Investor Perception: Challenge in building positive perception, especially among institutional investors.

    4. Valuation Concerns: Difficulty in determining a suitable valuation, impacting investor interest.

    5. Liquidity Issues: Limited secondary market liquidity for SME stocks.

    6. Dependency on Promoters: Risks associated with business dependence on key promoters.

    7. Regulatory Compliance: Resource-intensive compliance with regulatory requirements.

    8. Limited Analyst Coverage: Lack of research coverage affecting investor information.

    9. Economic Downturn: Adverse impact of economic downturns on post-IPO performance.

    10. Post-IPO Performance: Need to deliver on promises made during the IPO.

    11. Issuer’s Reputation: Negative events impacting IPO process and stock performance.

    12. Market Maker Risks: Risks associated with the performance of the appointed market maker.

    13. Disclosure Risks: Accuracy and completeness of information in the offer document.

    14. Promoter Dilution: Loss of control due to promoter stake dilution during IPO.


    Examples of Indian SMEs that have successfully conducted IPOs 

    Several Indian small and medium-sized enterprises have made successful forays into the stock market with their IPOs and have showcased their growth potential and resilience. Companies like Zomato, PolicyBazaar, and Nykaa have garnered significant attention and investor interest with their IPOs. These SMEs have leveraged their innovative business models and strong market presence to attract capital and expand their operations, marking a significant milestone in the Indian entrepreneurial landscape. These success stories not only reflect the growing confidence in the Indian SME sector but also demonstrate the opportunities available for businesses to thrive in the dynamic Indian economy.

    SME IPOs have emerged as a game-changer, providing small and medium-sized enterprises with a platform to access capital, enhance their visibility, and accelerate growth. This alternative funding avenue has opened up new opportunities, fueling innovation and economic development. As SMEs continue to harness the power of IPOs, it is crucial for business owners, investors, and regulatory authorities to collaborate, ensuring a robust ecosystem that supports and nurtures the growth aspirations of these dynamic enterprises.

G Akshay Associates