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IPO SME

What is an SME IPO?

Small and medium-sized enterprises (SMEs) are one of the lifelines of the Indian economy. Their contribution to the nation’s growth has been immense. However, despite being a growth engine, many SMEs find it tough to gain access to capital. In a bid to make it easier for such entities to raise funds, the Indian stock exchanges, along with the Securities and Exchange Board of India (SEBI), launched IPOs for SMEs in 2012. Here’s a comprehensive overview of what such an IPO entails.

What is an SME IPO?

An SME IPO is the process through which small and medium-sized enterprises issue their shares to the public for the first time in exchange for funds. The issue size of an SME IPO is usually very small compared to regular IPOs.

Small and medium-sized enterprises with post-issue capital not exceeding ₹25 crores are eligible to issue their shares to the public via an SME IPO. The shares of such companies are listed on dedicated SME platforms such as the Bombay Stock Exchange’s SME platform or the National Stock Exchange’s Emerge SME platform.

Features of SME IPOs

Now that you know what SME IPO means, let’s take a quick glimpse at a few of its key features.

  • Relaxed Eligibility Criteria

    For a small and medium-sized enterprise to opt for an IPO it must possess a net tangible asset of at least ₹3 crores, a net worth of at least ₹1 crore, and an average operating profit of ₹15 crores. Additionally, the SME must have an operational track record of a minimum of 3 years and must be able to show operating profits and positive net worth for the previous three financial years.
  • Lot Size

    According to the guidelines set by the SEBI, the minimum lot size for SME IPOs should be within the range of 100 to 10,000.
  • Other Prerequisites

    Disciplinary action should not have been initiated against the company, directors, promoters, or investors. Also, the promoters should hold at least 20% of equity capital post the IPO.

Difference Between an SME IPO and a Mainboard IPO

Initial Public Offerings are classified into two types - Mainboard IPO and SME IPO - based on the entity issuing them. Although the aim of the IPO remains the same, there are several significant differences between these two kinds of public issues. Here’s a quick overview of a few key differences.

Particulars SME IPO Mainboard IPO
Paid-up Capital Post the Issue ₹1 crore to ₹25 crores Minimum of ₹10 crores
Minimum Number of Allottees 50 allottees 1,000 allottees
Underwriting Underwriting is mandatory, with the merchant banker taking 100% of the risk and the company taking about 15% of the risk Underwriting is optional
Verification of IPO Documents Carried out by the stock exchanges Carried out by the SEBI
Typical Timeframe for the IPO Takes anywhere from 3 to 4 months Takes at least a minimum of 6 months
Average Application Size Minimum of ₹1 lakh ₹10,000 - ₹15,000
Listing on Stock Exchanges Can be listed only on one exchange. Can be listed on both exchanges.

Impact of an SME IPO

The launch of the SME IPO in 2012 created a profound positive impact on small and medium-sized enterprises. Companies that were erstwhile finding it difficult to raise funds can now do it effortlessly from the public. Unlike mainboard IPOs, SMEs wanting to raise funds don’t have to jump through several legal hoops to gain access to funds. The relaxed eligibility criteria ensure that almost all profitable enterprises have unfettered access to capital.

The launch of SME IPOs has also led to better transparency, accountability and governance on the part of the companies. And for investors, many of the IPOs of SMEs have gone on to deliver stellar returns, becoming primary wealth creators.

How Does SME IPO Listing Work?

Here’s a short overview of the typical process that a small and medium-sized enterprise must follow to get its shares listed.

  • Firstly, the company has to appoint a merchant banker. The merchant banker is an entity that works closely with the company to ensure that the IPO is managed professionally.
  • Once appointed, the merchant banker then compiles all the key data as part of an extensive compliance and due diligence activity. This includes both financial and corporate governance data.
  • The merchant banker then prepares the prospectus, which is a detailed document containing extensive information about the company. It contains information on the company’s financials, business, strengths and risks, details of the IPO, and more.
  • The prospectus is then filed with the SEBI and the stock exchange for verification and approval.
  • After carefully examining the prospectus and other associated documents for authenticity, SEBI and stock exchanges provide an in-principle approval for the IPO.
  • Once the in-principle approval is received, the company may then open its issue for subscription, provided it satisfies all the other laid-out conditions.
  • After the subscription period expires, the company, along with the merchant banker, proceeds to allot the shares to eligible investors.
  • A few days after allotment, the company’s shares are listed on the exchange and can be freely traded by investors.

Conclusion

With this, you must now be aware of the meaning of SME IPO, its various features and the kind of impact it has left. The number of SMEs going for IPOs has been steadily on the rise, with the momentum likely to hold steady in the future.

If you have any plans of investing in SME IPOs, make sure to first open an m. Stock trading and Demat account. With m.Stock, you get to enjoy zero brokerage trades for life across multiple segments. That’s not all. m.Stock also offers a robust, stable and fast platform that allows you to apply for IPOs with just a single click.

Frequently Asked Questions

An SME IPO is slightly riskier than the average mainboard IPO. This is due to the lack of information on the business fundamentals and track record of management and performance. However, there are a few IPOs of SMEs that have performed well in the long term. Ultimately, factors like the company’s fundamentals, corporate governance practices and market sentiment, among others are what determine whether an SME IPO is a good investment or not.

Yes. SME IPOs are safe since they’re heavily regulated by the Securities and Exchange Board of India (SEBI) and stock exchanges. However, there’s always an element of high investment risk with public issues of SMEs, making them more suitable for risk-aggressive investors.

Yes. As with any other public issue, you can sell the shares of an SME IPO that has been allotted to you on the listing day.

The stocks of small and medium-sized companies are termed SME stocks. Such companies are generally new and have high future growth potential.

Yes. SMEs with paid-up capital of not more than Rs. 25 crores may choose to get listed on either the Bombay Stock Exchange’s SME platform or the National Stock Exchange’s Emerge SME platform.

No, a nominee is the person designated by the account holder to receive the securities held in the demat account in case of the account holder's death. The nominee has no ownership rights before this event. In case of the account holder's death, due process is followed and the shares can be transferred to the nominee or other legal heirs as per the account holder's will and/or declaration.

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