SME IPOs – Small & Medium Enterprises Initial Public Offerings

SMEs (Small and Medium-sized Enterprises) are the backbone of the Indian economy. SMEs in India are allowed to launch IPOs ( Initial Public Offerings ) and raise funds from investors. However, the rules for mainboard and SME IPOs are different in India. Some rules are relaxed for SMEs to help them raise capital. Let’s understand what is an SME IPO is in detail.

What is an SME IPO?

You might have heard of large-scale companies raising funds by issuing their shares in an IPO. However, large-scale companies aren’t the only ones that can launch an IPO in India. Thanks to the Securities and Exchange Board of India (SEBI), SMEs can launch their IPOs and raise funds. Stock exchanges have also helped by providing a different segment for SMEs to launch their IPOs. SME IPOs were first introduced in 2012 and have helped many small and medium-sized companies to raise funds.

SME IPOs are usually launched on specialised segments of stock exchanges, like NSE Emerge and BSE SME. The eligibility criteria for an SME to launch its IPO is simpler than that of a large-scale company. The issue size will also be smaller for an SME IPO compared to a mainboard IPO. SME IPO listing is usually approved by the concerned stock exchange itself. On the other hand, mainboard IPO requests are vetted and approved by the SEBI.

How does it work?

As discussed above, an SME IPO is different from a mainboard IPO in India. There are special segments of stock exchanges reserved for SME IPOs. Also, the concerned stock exchange will cross-check the prospectus and IPO application of an SME. It is different from mainboard IPO, where applications are approved by SEBI. SME IPOs are considered to be riskier for investors compared to mainboard IPOs. Not every SME will have strong fundamentals, thus leading to investment risks.

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Before applying for an SME IPO, there are some eligibility rules. For instance, the post-issue paid-up capital of an SME must not go beyond INR 25 crores. Similarly, there are other rules for becoming eligible for an SME IPO. Here’s how SME IPOs work in India:

• The concerned SME must meet the eligibility conditions imposed by SEBI and the respective stock exchange to launch an IPO. For instance, the IPO application size of the investor must be a minimum of INR 1,00,000 in an SME IPO. Another rule says there should not be any winding-up petition against the concerned SME in the court.

• After becoming eligible, the SME files its prospectus and IPO application with the concerned stock exchange. The SME will hire underwriters to decide on the share price before submitting the IPO application.

• After verification, the stock exchange will approve or reject the IPO application or prospectus. When approved, the SME can indulge in spreading the word about its IPO to attract more investors.

• The IPO date, share price, price band, and other details are finalised in advance. The concerned SME also issues a final prospectus for investors to understand more about the company.

• The IPO is launched on the given date on a special or dedicated stock exchange platform. The dedicated platform of the stock exchange will be reserved for SME IPOs.

• One can apply for an SME IPO once it is open for investors. The issue will receive IPO applications during the subscription period and verify them. Once the IPO closes, the company starts the process of allotment, which is distributing shares to selected investors.

Features of SME IPOs

There are certain features of SME IPOs that are different from mainboard IPOs. You cannot follow the same rules for investing in IPOs of SMEs. Here are some features of SME IPOs that investors must know:

• The minimum post-issue paid-up capital for an SME in India is INR 3 crores. It means the company must have a contributed capital of at least INR 3 crores after the SME IPO.

• As per the Companies Act 2013 terms, SMEs must show profitability for two out of the previous three financial years to launch an IPO. It is crucial to note that profitability, in this case, does not include other income. Companies failing to showcase profitability might be denied from launching IPOs.

• The application size for a mainboard IPO is usually small. However, the IPO application for an SME will be at least INR 1,00,000 in India. It increases the risk for investors, as a large amount is involved. For the same rationale, investors with a higher risk tolerance indulge in SME IPOs.

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• The minimum number of allottees for an SME IPO in India is 50. Allottees are the individuals who receive shares after the IPO closes. It is different from mainboard IPOs, which have a minimum of 1,000 allottees.

• An SME IPO upcoming will be approved by the concerned stock exchange.

• SMEs are required to submit half-yearly financial reports. Since SMEs become public entities after launching their IPOs, they must submit financial reports.

How to Apply for an SME IPO?

Are you eyeing an upcoming IPO for investment? If yes, you must stay familiar with the application process for an SME IPO. Here’s how to apply for SME IPOs in India in detail:

• Research About the SME

  You cannot invest in a SME IPO without prior analysis and research. As discussed above, an SME might not have strong fundamentals. Also, SME IPOs are riskier than mainline IPOs. Research and analysis are essential for an SME IPO for the same rationale. Even though the SME was a private entity beforehand, try to collect as much information as possible. Refer to the RHP (Red Herring Prospectus) of the concerned SME to gather more information.

• Open a Demat Cum Trading Account

  Before you apply for an SME IPO, it is essential to have a Demat cum trading account. The trading account is required to trade SME shares. After receiving shares in an SME IPO, you might decide to trade them on the stock exchange. It is where you will require a trading account. On the other hand, a Demat account is required to hold shares received in an SME IPO.

• Submit the SME IPO Application

  You will require a trading account to submit an SME IPO application. Also, submit the SME IPO application on the dedicated platform of the stock exchange like NSE Emerge or BSE SME. Investors must submit their SME IPO applications during the subscription period. Your IPO application will not be accepted after the subscription period. Also, enter accurate details in the SME IPO application.

• Wait for Allotment

  Investors must wait for the issuer to start the allotment process. The allotment process begins after the IPO subscription period. When selected, the issuer transfers electronic shares directly to your Demat or dematerialisation account.

In a Nutshell

SME IPOs are for investors with a high-risk tolerance. Such investors can purchase shares of an SME and wait for it to improve its performance. If the SME turns into a large-scale company in the following years, you can earn multifold returns on the shares. Investors must understand the differences between mainline and SME IPOs before making a decision. Application size, minimum number of allottees, reporting requirements, and other features are different for mainline and SME IPOs. You can rely on a trading platform to search upcoming SME IPOs and submit applications timely. Check out the upcoming SME IPOs in India now!