What is SME IPO and what makes it different from regular IPO

Initial Public Offerings (IPO) is the process by which a private company can go public by sale of its stocks to general public. It could be a new, young company or an old company which decides to be listed on an exchange and hence goes public. Initial Public Offering help a company raise money through the issue of public shares. After the IPO, the company gets listed on a stock exchange, and its shares become freely tradeable in the market. In recent years, investors in India have shown a keen interest in IPOs, with many IPOs posting remarkable oversubscriptions. 

The definition of SME may vary with financial laws and statutes amendments. Presently, enterprises with an investment of Rs. 1 to 10 crores and turnover of Rs. 5 to 50 crores are considered small enterprises. Whereas enterprises with investments between Rs. 10 to 20 crores and turnover of Rs. 50 to 100 crores are medium enterprises.

What is SME IPO?

SME IPO is a Small and Medium Enterprise (SME) IPO. Stock exchanges offer SMEs a lateral entry into the stock market through SME IPOs. It is an opportunity for promising companies to attract investments. An SME IPO is a way for a privately owned Small and medium enterprises (SME) company to sell its shares to the public for the first time and gets listed at BSE SME or NSE Emerge platform. Companies with minimum post-issue capital of Rs 1 crore and a maximum of Rs 25 crores are eligible for SME IPO in India.

Approximately 360 SMEs have opted to be listed in BSE through the SME IPO route, while NSE reports that around 247 such companies are listed on its platform.  

Listing Criteria of SME IPO & Main Board IPO

Now that you know what SME IPO is, let's look at its listing criteria:

Furthermore,

• The company must have a post-issue face value (paid-up capital) of not more than Rs 25 crores

• Its net tangible assets must be Rs 1.5 crores

• It must have a positive net worth

• It must have positive cash withdrawal from operations for the previous 2 years

• The company must have a track record of at least three years

• In case of companies converted from proprietorship, partnership or LLP, the combined legacy must be three years OR be funded by a bank, financial institutions, or governments, OR have a group company listed in the exchange

• The company must have an agreement with both the depositories NSDL and CDSL to facilitate trading in demat securities

• There must be no changes in the promoter holdings in the one year leading up to its application for the SME IPO

• The company must have a website

• 100% of the IPO must be underwritten, with at least 15% issue size appearing in the merchant banker's books)

Notably, the Bombay Stock Exchange and the National Stock Exchange offer the BSE SME and NSE EMERGE platforms for this purpose.

Difference Between SME IPO and IPO (given above table to show difference)

A few other significant differences between IPO and SME IPO are:

• As these companies are small in terms of operations, the issue size of an SME IPO is smaller than a regular IPO

• After an SME IPO, the newly listed SME is not listed in BSE or NSE, unlike other companies. BSE has the BSE SME platform, while NSE has the NSE EMERGE platform

• The minimum allottee requirement for an SME IPO is only 50. In the case of a regular IPO, this requirement is a minimum of 1000

• SEBI validates an IPO's documentation. This includes the all-important Draft Red Herring Prospectus (DRHP). In the case of SME IPOs, the stock exchanges take care of these validations

• In regular IPOs, the application size ranges between Rs 10,000 and Rs 15,000. In SME IPOs application size can be higher than Rs 1,00,000

Steps Involved in SME IPO

The steps in SME IPO listing include the following:

• Underwriter's Appointment: The underwriter or merchant banker analyses the company's financials. They arrive at the key numbers, like the share price band and funds required to be raised. 

• Due Diligence: It is an exercise that involves verifying the facts, accounts, and information to be presented by the company. Discrepancies must be identified and rectified at this stage of IPO preparation.

• Appointments: Parties like bankers, registrars, and market makers are hired. The hiring of these service providers is crucial, as the success of the SME IPO depends on their efficiency.

• DRHP: Based on the analysis and due diligence, the SME is ready with the facts and figures that go into the DRHP. The prospectus includes information on the company, its financial performance, operations, fund utilisation plans, etc. 

• Filing of the Prospectus: In SME IPOs, the prospectus is filed with the stock exchange, which verifies and approves the same.

• In Principle Approval: The company receives in-principle approval, with complete approval given before the issue opens. Once approved, the prospectus is available to the public. The prospectus is an important document that helps investors decide on their investment decision.

• Issue made Available: Once all the necessary approvals are obtained, the SME can go ahead and open the public issue. The issue remains open for a specific number of days. A few days after the issue closure, allotment is made to the applicants.

• SME Listing: After the subscription and allotment of shares, the shares are listed on the SME platforms of BSE and NSE. With time, these shares can move on to the main board of the stock exchange.

Migration Criteria

Companies listed for at least two years in the SME company platform can apply for migration to the mainboard of the stock exchange.

• The company must have a paid-up capital of more than Rs 10 crores

• The market capitalisation of the company must be at least Rs 25 crores

• The company or its directors/promoters must not be debarred by the SEBI

v At least two-thirds of the non-promoter shareholders must vote in favour of the migration in a special resolution in the company's AGM

Use your IDFC FIRST Bank Net Banking profile to apply for an upcoming SME IPO, in a few clicks,

• Log in to your Net Banking/ Mobile App profile

• Go to Accounts/Have  > “Investments” option appearing on the dashboard screen

• Click on ‘Invest into IPO-ASBA”

• Current available IPOs will appear in a tabular format on the next screen. Click “Apply” on the SME IPO you want to apply for

• Register Demat details one time for application, Investor Category and Bid Quantity

• Click on “Place Order” after clicking on the undertaking-related tick box

Your SME IPO application through IDFC FIRST Bank Net Banking is complete.

Conclusion

SME IPO listing provides a sustainable ecosystem for startups and smaller companies to connect with potential investors. They get an early growth opportunity, while smart investors stand to gain multi-bagger-like returns. Therefore, it is gaining popularity among SMEs as a fundraising option and among investors as an alternate investment sub-class.

Disclaimer

The contents of this article/infographic/picture/video are meant solely for information purposes. The contents are generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. The information is subject to updation, completion, revision, verification and amendment and the same may change materially. The information is not intended for distribution or use by any person in any jurisdiction where such distribution or use would be contrary to law or regulation or would subject IDFC FIRST Bank or its affiliates to any licensing or registration requirements. IDFC FIRST Bank shall not be responsible for any direct/indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information mentioned. Please consult your financial advisor before making any financial decision.