What is SME IPO?

An SME IPO refers to the first time when small and medium-sized companies raise capital from public investors. These IPOs are issued by companies that meets the SME eligibility criteria. The SME full form in IPO is Small and Medium Enterprise. An SME IPO helps growing businesses access funds for expansion, working capital needs, or to strengthen their balance sheet. These issues are listed and traded on dedicated SME platforms such as the National Stock Exchange (NSE) Emerge and the Bombay Stock Exchange (BSE) SME. These IPOs are specifically designed to support smaller companies with simplified regulations and lower listing requirements. This article explains what is SME IPO, how it works, its features, advantages, and more.  

How Does the SME Listing Process Work? 

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

1. 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. 
2. 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 has become a valuable tool for investors, as it allows them to manage the analysis of financial data and inform decision-making. 
3. 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. 
4. 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. 
5. 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. 

Having understood what SME IPO means and how it works, let’s understand its eligibility criteria.  

SME IPO Eligibility Criteria 

• SME IPO eligibility criteria to issue IPOs and secure a listing on the exchange are: 
• 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. 
• A track record of at least three years is required for SMEs formed by converting partnership/proprietorship/LLP firms. 
• The SME must maintain an operational website. 
• Promoters of the company should remain unchanged for a year after filing the IPO. 
• The SME must agree to engage in Demat securities trading. 
• A contractual agreement with the depositories is mandatory for the SME. 

Features of SME IPOs 

The following are the key features of SME IPOs. 

1. Simplified Regulatory Compliance: SME IPOs follow a particular set of compliance requirements compared to the mainboard IPOs. These regulatory norms are customised to make the market accessible and less costly for small and medium enterprises.  
2.  Lower Minimum Issue Size: The minimum issue size for SME IPOs is smaller, helping new businesses to raise funds without meeting the higher thresholds required for mainboard listings. 
3. Market Visibility and Credibility: Greater visibility is provided to companies that are listed on the SME platforms. It improves the company’s credibility and helps build trust in the market. 
4. Access to Institutional Support: SME IPOs can attract participation from institutional investors such as alternative investment funds (AIFs), venture capital firms, and professional investors, helping companies strengthen their financial ecosystem. 
5. Retail Participation: These IPOs help retail investors invest in high-growth small and medium enterprises. This creates broader market participation and offers potential early-stage growth opportunities. 
6.  Dedicated SME Platforms: SME IPOs are exclusively listed on specialised platforms such as National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE). These are designed to support the needs and scale of growing businesses. 
7. Post-Listing Migration Option: After meeting specific eligibility criteria, companies listed on the SME platform can migrate to the mainboard, offering long-term growth and a wider investor base. 
8.  Cost-Effective Listing Process: The overall cost of listing such as underwriting, advisory, and compliance is comparatively lower, making it feasible for smaller enterprises. 

Advantages & Disadvantages of SME IPOs 

The table below shows the advantages and disadvantages of SME IPOs 

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 crores (exceeding SEBI's Rs. 3 crore requirements). 
• Minimum Trading Members: 25. 
• Application Value: Rs. 1 lakh for retail, Rs. 5 lakhs for non-retail. 

Lock-in Period and Track Record: 

• Lock-in Period: 3 years for promoters' shares. 
• Track Record: At least 3 years of operation. 
• Reapplication Restrictions: 
• Reapplication after rejection: Minimum six months. 
• Minimum application and trading lot size: Not below ₹1 lakh. 

Disclaimer: All investments are subject to market risks, economic conditions, regulatory changes, and other external factors. Returns are not guaranteed and may vary based on market performance and investment tenure. Investors should assess their risk tolerance and financial objectives, conduct their own research, and consult a qualified financial advisor before making any investment decisions. 

Conclusion 

SME IPOs provide small and medium-sized enterprises with a unique opportunity to raise capital by listing their shares on the stock exchange. In India, individuals open Demat account and follow specific procedures for subscribing. SME IPOs differ from traditional IPOs in size, fundraising purpose, and listing requirements. Despite complexities, they provide a crucial avenue for growth and expansion. Platforms like BlinkX Share Market app allow investors to easily access and participate in these investment opportunities, supporting SMEs' development in the Indian economy.