Do you also feel only big companies in the country run the economy of the country? Well if yes, then you are wrong my friend. SME plays a prominent role in the economy and it’s built-up. But what is SME?
SME means Small and medium-sized enterprises. These businesses have their assets, revenue, or number of employees fall before a certain fixed threshold limit. The criteria for an enterprise to qualify as an SME would be different for each country. In India, the threshold limit for SME enterprises is,
| Classification | Investment threshold limit | Turnover threshold |
| Small Enterprise | Rs. 1 crore to Rs. 10 crore | Rs. 5 crore to Rs. 50 crore |
| Medium Enterprise | Not more than Rs. 50 crore | Not more than Rs. 250 crore |
Today in this blog we are about to discuss SME IPO. So what is an SME IPO?
SME IPOs are the initial public offerings made by Small & medium-sized enterprises to raise capital by offering a part of their ownership in the form of shares to the general public. A private company that falls under the threshold of SME goes for fundraising via public issues.
Eligibility criteria to go for SME IPOs
There’s a list of requirements for an enterprise to go for an SME IPO, which are
- Post issue paid up capital – Upto 25 crore
- Net tangible assets – At least 3 crore as per the latest audited financial results
- Net worth (excluding revaluation reserve) – At least 3 crore as per the latest audited financial results
- Minimum number of members for the issue should be 50 (Not required after listing)
- The company must have a website
- Track record of distributable profit for at least 2 years immediately preceding three financial years, as per section 123 of the Companies Act, 2013.
- The company has to agree to trade in Demat securities and enter into an agreement in the depositaries.
- The promoters should remain the same after filing the IPO for a year at least.
Difference between SME IPOs and Mainline IPO
| Basis | SME IPOs | Regular IPOs |
| Issued by | Small & Medium-Sized Enterprises | Larger Companies |
| Issued paid-up capital | Maximum Rs. 25 crore | Minimum Rs. 10 crore |
| Application size | Minimum IPO application size is Rs. 1 lakh | Minimum application size ranges between Rs. 10,000 to Rs. 15,000 |
| Cost & time | Comparatively less expensive & less time-consuming | More expensive and time consuming |
| Filing of accounts | Need to file half-yearly audited accounts | Need to file quarterly audited accounts |
| Underwriting requirements | Mandatory (at least 15% by merchant banker) | Not Mandatory |
| Market making | Market making is mandatory for 3 years by merchant bankers | Not mandatory |
| Market liquidity | Limited | Higher |
| Eligibility norms | Relaxed eligibility norms | Stringent & complex norms |
| Procedural compliances | Comparatively less procedural | Complex and lengthy |
| Listing | At NSE SME exchange or BSE SME | NSE or BSE |
SME listing procedure
The SME listing process is similar to mainline IPOs but has some differences,
- Appointment of Merchant Banker
After all the necessary documentation about the Memorandum of Association and Articles has been made. All the appointments of the Managing Director, Independent Director, Whole Time Director, Company Secretary, the constitution of committees, preparation of the website, and necessary filing have been made. The first step for SME listing is to appoint a merchant banker. The merchant banker is also known as the underwriter who carries expertise in market work. Underwriters draft documents related to the IPO and decide the IPO price. - Prepare a Draft Red herring prospectus
The merchant banker now needs to draft the red herring prospectus with the company’s information, operations, and prospects for the potential investors. DRHP helps Investors to analyze the financial performance of the company and to make investment decisions. - Filing of Red herring prospectus
Once the draft red herring prospectus (DRHP) is ready, it is time to file the red herring prospectus with the Securities and Exchange Board of India (SEBI). SMEs also need to submit and get it verified with the recognized stock exchange and the registrar. - Final Prospectus
Once the stock exchange approves the DRHP, the merchant banker moves to the final prospects. The final prospectus includes IPO opening and closing dates, issue price, quantity, lot size, etc. The final prospectus is now filled with the stock exchange and SEBI. - Advertisement of IPO
After receiving all the necessary approvals, the underwriters, banks, and stock exchange have all the prominent information about the company it requires to go public. After which the company goes for marketing of the new IPO to reach its potential investors. - Launch of the SME IPO
The final step is to launch the SME IPO, this date is known as the opening date. Investors have the option to subscribe to a lot of shares until the closing date. The bid period remains open for 3 days. The investors whose bids are now selected get the allotment of the shares. Once the investors receive their shares the IPO is completed. Now the other investors can buy the SME shares from the secondary market.
Advantages of SME IPO
SME IPOs have several benefits, some of which are,
- Better capital – If an enterprise decides to go for IPO, it gets access to better capital raising
- Liquidity – When shares are listed and traded in stock exchanges, it provides liquidity to the shareholders
- Goodwill – IPO helps build a good reputation and goodwill in the market
- Financial performance – The valuation of the company increases with the public listing and increases the financial performance of the company
- Employees incentive – Employees get a chance to incentives like stock options or Performance-based bonus
Challenges of SME IPO
With every benefit, comes a challenge, and the same goes with SME IPO.
- Costly – Going for IPO is not an overnight change. It requires proper planning and considerable cost. The fees for legalities, underwriting, and accounting services can be expensive.
- Time-consuming – The IPO process is often time-consuming and requires special attention from personnel.
- Procedural compliances – The IPO process is complicated, lengthy, and regulatory. Compliance with every law can be a task at times.
- Risks – There’s always a liquidity risk for SMEs in comparison to larger companies.
- Volatility – The market can be volatile and this can impact the valuation of the company.
Factors to consider
Any SME should consider the following factors before going for an SME IPO.
- Valuation – Any discrepancy in valuation can lead to a company’s loss. The valuation should be made properly keeping in mind the financial performance, market conditions, rivals, expansion potential, and enterprise goals.
- Timing – Many IPOs fail due to wrong launch timing. The company has to be stable in terms of finances and should have a good track record before going public.
- Planning – An SME should follow the best practices before going for an IPO. Have a sound business plan, a tough team, and, complied practices.
Bottom line
To conclude, SME IPOs are similar to mainline or regular IPOs with minute differences. Small and medium enterprises go for IPOs to raise capital from the public and to expand their business. With the great advantages of the initial public offering, SMEs also face challenges and risks related to the issue. SMEs play a vital role in the growth of the country’s economy. As well as it offers a promising prospect for investors to diversify their portfolios and earn better returns.