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What is SME IPO?

What is SME IPO?

SME IPOs, similar to traditional Initial Public Offerings (IPOs), are offerings launched by Small and Medium Enterprises. When private funding falls short of meeting financial needs, SMEs turn to IPOs to raise capital. Post-IPO, SME stocks are listed for trading on the stock exchange, allowing public investors to become stakeholders by acquiring shares in the SME.

Understanding SME IPO

SME IPO involves recognizing the unique process through which small and medium-sized enterprises (SMEs) in India go public. To engage in stock market investment in the country, individuals typically open demat accounts. While buying stocks from the market is a common practice, subscribing to an IPO follows a distinct procedure. In the case of SME IPOs, these smaller enterprises seek capital for growth or expansion by offering their stocks to the public. 

The primary distinction between a standard IPO and an SME IPO lies in the size of the launching company, with SMEs taking this route for fundraising. Differences also extend to the purpose, listing requirements, and associated processes/rules for SME IPOs compared to their larger counterparts.

Example of SME IPO

Suppose there's a successful family-owned textile business in Surat, Gujarat, named "Vibrant Fabrics Pvt. Ltd." that has flourished through private investments but is now eyeing substantial expansion. To fuel their growth, Vibrant Fabrics decided to conduct an SME IPO. They offer shares to the public, allowing individuals to become stakeholders in their venture. This SME IPO serves as a means for Vibrant Fabrics to raise capital from a broader investor base, contributing to their future development and market presence.

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Table of Content

  1. Understanding SME IPO
  2. How SME Listing Process Works?
  3. SME IPO Eligibility Criteria
  4. Requirements for SME IPOs to go Public 
  5. How to Invest in an SME IPO?

How SME Listing Process Works?

Understanding the process of SME listing involves navigating through paperwork and compliance. Private SMEs aiming for an IPO follow these steps:

  • Appointing an Underwriter

    Commencing the SME IPO journey involves engaging a skilled merchant banker or underwriter, an expert in market dynamics. This professional plays a pivotal role in drafting essential IPO documents, ensuring precision through thorough due diligence.

  • Preparing the DRHP

    Before going public, potential investors seeking insights into the company prompt the underwriter to create a comprehensive Draft Red Herring Prospectus (DRHP). The DRHP becomes a valuable tool for investors, managing the analysis of financial data and informed decision-making.

  • Submitting the DRHP

    Diverging from the traditional IPO submission route to SEBI, SMEs verify the DRHP with the Stock Exchange, adding an extra layer of scrutiny to meet the exchange's standards.

  • Advertising and Announcing

    Upon Stock Exchange approval, underwriters transition to the role of announcers, revealing critical IPO details such as opening and closing dates and the issue price. Subsequent advertising endeavours are launched to attract public investors.

  • Launching and Allotting Shares

    The official launch of the IPO marks a crucial stage, allowing investors to subscribe before the closing date. The subsequent allotment process assigns shares to selected investors, completing the SME's transformation into a publicly traded company.

After this process, the company transforms into a public entity, and other investors can purchase its shares in the secondary market.

SME IPO Eligibility Criteria

SMEs become eligible to issue IPOs and secure a listing on the exchange by fulfilling the following criteria:

  • The SME must be incorporated according to the Companies Act, of 1956.
  • The SME's face value (post-issue paid-up capital) should not exceed ₹25 Crore.
  • The SME should possess net tangible assets valued at a minimum of ₹1.5 Crore.
  • For SMEs formed by converting partnership/proprietorship/LLP firms, a track record of at least three years is required.
  • The SME must maintain an operational website.
  • Promoters of the company should remain unchanged for a year post filing the IPO.
  • The SME must agree to engage in Demat securities trading.
  • A contractual agreement with the depositories is mandatory for the SME.

Requirements for SME IPOs to go Public 

Here are some requirements for SME IPOs to go public:

SEBI Guidelines:

  • Issue Size: Rs. 10 crores to Rs. 25 crores.
  • Minimum Members for Issue: 50.
  • Post-Issue Paid-up Capital: Rs. 10 crore (exceeding SEBI's Rs. 3 crore requirement).
  • Minimum Trading Members: 25.
  • Application Value: Rs. 1 lakh for retail, Rs. 5 lakh for non-retail.

Lock-in Period and Track Record:

  • Lock-in Period: 3 years for promoters' shares.
  • Track Record: At least 3 years of operations.

Reapplication Restrictions:

  • Reapplication after rejection: Minimum six months.
  • Minimum application and trading lot size: Not below ₹1 lakh.

How to Invest in an SME IPO?

Below is the process for an SME IPO investment which is similar to a regular IPO:

  • For investing in an SME IPO, you will need to have a Demat account app if you don't own one, you can instantly open a free account with the BlinkX share market app
  • Access the IPO section on your trading app to view available IPOs.
  • Choose the SME IPO, place your bid, and allocate funds accordingly.
  • Check the lot size for SME IPOs which should be notably larger than regular IPOs.
  • Applying for an SME IPO may cost around Rs.1 lakh, considering the larger issue size.

Conclusion

SME IPOs provide a vital route for small and medium enterprises to secure cash when private investment is insufficient. The process encompasses engaging underwriters, preparing comprehensive documents, and more. Success in an SME IPO depends on adhering to SEBI guidelines, maintaining a robust track record, and navigating the process precisely. As SMEs embrace the opportunity to go public, they secure funding for growth. With the aid of share trading apps, they invite public investors to become stakeholders, contributing to the broader market landscape.

FAQs on SME IPO

Investing in SME IPOs can be a good choice but it involves risks. It's crucial to research SMEs thoroughly, considering their financial health, business model, and market potential.

Eligibility for SME IPOs varies, with criteria such as incorporation under the Companies Act, of 1956, a face value cap of ₹25 Crore, and a stable promoter structure.

Certainly. Similar to other public offerings, you have the option to sell the shares allocated to you in an SME IPO on the listing day.

Companies with a maximum capital of Rs 25 crores are eligible to undergo an SME IPO in India.

Yes, trading in SME shares is allowed post-IPO listing. Investors can buy and sell SME shares on stock exchanges where the company is listed, subject to market regulations.

The post-issue paid-up capital must not surpass Rs 25 crores, and the company is required to have a minimum track record of three years.