What is SME IPO?

SME IPOs, similar to traditional Initial Public Offerings (IPOs), are offerings launched by Small and Medium Enterprises. When private funding fails to meet 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 Meaning

SME IPO means recognising 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 expected, subscribing to an IPO follows a distinct procedure. SME IPO full form is Small and Medium Enterprise IPO. 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.

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:

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 has become a valuable tool for investors, as it allows them to manage the analysis of financial data and inform 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

SME IPO eligibility criteria 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.
• 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 various features of SME IPOs are as follows.

1. A small and medium-sized enterprise must declare an initial public offering on an exchange to list and trade stocks on an SME platform. 
2. The SME's paid-up capital must not exceed Rs. 25 crore after the issue. 
3. The eligibility criteria for directors, promoters and investors involved in SME initial public offerings are similar to those of a normal Initial Public Offering. 
4. Therefore, these individuals are not defaulters, offenders or those who have been excluded from the capital markets.

Normal IPO Vs SME IPO

There are specific differences between the two types of initial public offerings. Below are some of them. 

1. Company size

Companies must have a post-issue paid capital of at least 10 crores for a regular initial public offering. In the second case, the minimum post-issue paid capital is 1 crore, and the maximum is 25 crores.

2. Validation

In a typical initial public offering, SEBI confirms that the DHRP and other vital documents are valid. However, the stock exchange will carry out validation and other activities in the second case. 

3. Minimum allottees

The minimum number of allottees should be 1000 for regular stock offers. However, the SME IPO should include a minimum 50 allottees.

4. Application size

The average initial public offering size is between 10,000 and 15,000. For small companies, the public offer is larger, i.e., 1 lakh.

SME IPO Example

Suppose a successful family-owned textile business in Surat, Gujarat, named "Vibrant Fabrics Pvt. Ltd." 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.

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 The Ipo Process for SME Works?

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 more extensive than regular IPOs.
• Applying for an SME IPO may cost around Rs.1 lakh, considering the larger issue size.

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 accounts 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.