Investments
SME IPO
An SME IPO, or Small and Medium Enterprises Initial Public Offering, refers to the process through which small and medium-sized companies raise capital by listing their shares on a stock exchange. This allows them to access public investment to fund their growth and expansion plans. Unlike large enterprises, SMEs often face challenges in obtaining financing from traditional sources, so an IPO provides a valuable alternative.
If you've ever wondered how small businesses can raise funds to grow and expand, you're in the right place! We'll explore what is SME IPO is, how it works, and the benefits it offers both businesses and investors.
What is an SME IPO?
SME IPO means a way for small and medium enterprises to raise money by selling their shares to the public. The SME IPO full form is small and medium enterprise initial public offering. Through an SME IPO, businesses can get listed on special stock exchange platforms that have easier rules compared to the main stock market.
As more people are learning the SME IPO meaning, many small businesses are now looking at this option to get the funds they need to grow.
SME IPO eligibility criteria
To qualify for an SME IPO, companies must meet specific criteria established by the Securities and Exchange Board of India (SEBI):
- Post-issue paid-up capital should be less than or equal to ₹25 crores.
- Net worth: Minimum ₹1.5 crore
- Tangible assets: At least ₹3 crores, with 50% held in India
- Also, companies must demonstrate positive cash accruals for 2 out of the past 3 years, not just profitability or net worth.
- A registered market maker must provide buy–sell quotes for 75% of trading hours for 3 years, ensuring liquidity.
- No change in company name during the preceding year.
- IPO of the SME must be 100% underwritten, ensuring complete subscription.
- The company must appoint a merchant banker registered with the SEBI for managing the issue.
- The entity should not have been referred to the Board for Industrial and Financial Reconstruction (BIFR).
Features of an SME IPO
| Feature | Description |
|---|---|
| Target companies | Small and medium enterprises (SMEs) |
| Eligibility criteria | Lower than main board IPOs; include minimum net worth and profit requirements. |
| Issue size | Generally, smaller compared to the main board IPOs. |
| Stock exchange platform | Listed on NSE Emerge or BSE SME platforms. |
| Minimum investment | Higher minimum lot size than the main board (to attract serious investors). |
| Compliance requirements | Simplified and less complex regulatory norms. |
| Cost of listing | Lower listing fees and reduced compliance costs. |
| Disclosure requirements | Lighter disclosure norms compared to main board listings. |
| Liquidity | Usually, lower liquidity due to a niche investor base. |
| Investor base | Focuses on long-term, risk-aware investors. |
SME listing process – how it works
1. Preparation phase
- Appoint a SEBI-registered merchant banker who will guide the entire process.
- Conducting internal due diligence to ensure readiness for public scrutiny.
- Preparing financial statements and ensuring compliance with accounting standards.
- Determining the issue size and pricing based on the company's valuation.
2. Documentation and approval phase
- Preparing the draft offer document with all required disclosures.
- Submit the draft document to the stock exchange for in-principle approval.
- Filing the offer document with SEBI for observations.
- Addressing any concerns raised by SEBI or the exchange.
- Finalising and filing the prospectus with the Registrar of Companies (ROC).
3. Issue phase
- Opening escrow accounts for fund collection.
- Marketing the issue to potential investors.
- Opening the subscription period for the SME IPO.
- Collecting applications and funds from investors.
4. Post-issue phase
- Finalising the basis of allotment after the subscription closes.
- Processing refunds for unsuccessful applicants.
- Allotting shares to successful applicants.
- Completing the listing of shares on the SME platform of the stock exchange.
- Initiating mandatory market-making activities for the next three years.
Throughout this process, the merchant banker plays a crucial role in ensuring compliance with all regulatory requirements and facilitating the smooth execution of the IPO SME.
Impact of SME IPO
The IPO SME has brought many benefits to growing businesses. It helps companies lower their debt by raising money through selling shares, which improves their financial strength.
Being listed through an SME IPO also increases a company’s visibility, helping to build trust with customers, suppliers, and banks. It gives existing shareholders a way to sell their shares more easily and offers a clear way to value the business.
An SME IPO also encourages better business practices, as listed companies must follow rules for transparency and good governance, which is good for both the company and its stakeholders.
Conclusion
The SME IPO is a big step forward for India's capital markets, helping small and medium businesses get the funding they need. By learning about the SME IPO and how they work, growing companies can use this opportunity to support their expansion plans. Although businesses need to prepare carefully and follow certain rules, the benefits, like easier access to money, better visibility, and stronger management, make it worth the effort.
For entrepreneurs thinking about launching an SME IPO, it’s wise to partner with experienced financial institutions that offer end-to-end guidance. Axis Bank’s Demat Services provides comprehensive support throughout the entire listing journey.
FAQs
Is it good to invest in an SME IPO?
Investing in an SME IPO can offer high growth potential, but it comes with higher risks. Investors should thoroughly research the company's fundamentals, management quality, business model, and growth prospects before investing, as these stocks typically have lower liquidity than main board listings.
What are the risks of an SME IPO?
Key risks include lower liquidity, higher volatility, limited operating history, and less public information compared to larger companies. Additionally, SME IPO companies may face greater business execution challenges and market competition risks that could impact their performance.
What is the difference between an SME IPO and a normal IPO?
An SME IPO differs from a normal IPO in terms of eligibility and compliance — it requires lower post-issue capital (up to ₹25 crores), fewer minimum allottees (50 vs. 1,000), mandatory three-year market making, 100% underwriting, and relaxed compliance norms compared to mainboard IPOs.
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