The investing world has evolved tremendously, and increasingly, small and medium-sized enterprises (SMEs) are stepping into the public market to raise capital. If you have ever considered investing in emerging companies or wondered how small businesses grow to reach new heights, you may have encountered the term SME IPO.
Understanding what an SME IPO is, the eligibility criteria for companies, and the listing process can offer valuable insights into how these smaller companies transition to the public space.
What is an SME IPO?
An SME IPO (Initial Public Offering) refers to a public offering where small and medium-sized enterprises (SMEs) issue shares to the public for the first time. These SMEs generally have lower market capitalisation than larger companies but still want to raise funds to fuel their growth.
SME IPOs help these businesses access the public capital markets, where they can offer their shares to investors, which the latter then can subscribe to after they successfully open Demat Account.
What is the Eligibility Criteria for SME IPO
To issue an SME IPO, the company must meet the following criteria.
- The issuing company must be registered under the Companies Act 1956/2013 in India.
- The paid-up capital of the issuer at face value must not exceed ₹25 crore.
- The company must be operational for the last three years.
- The company must show ₹1 crore in operating profit (earnings before interest, depreciation, and tax) for at least two of the past three years.
- The issuing entity must have a positive net worth.
- Free cash flow to equity (FCFE) must be positive for any two of the last three financial years.
- The offer for sale by the issuing company’s shareholders in an SME IPO should be a maximum of 20% of the total issue size.
- The applicant company must not have faced material disciplinary proceedings by any stock exchange or regulator in the preceding three years.
- The company must have net tangible assets of at least ₹3 crores in the previous two financial years.
- The company’s debt-to-equity ratio should not exceed 3:1.
- The applicant company, promoters, promoting company(ies), and subsidiary companies must not have any pending defaults regarding payment of interest or principal to debenture, bond, or fixed deposit holders.
- Issuing company directors must submit records regarding any ongoing investigations or legal proceedings.
- The company’s articles of incorporation must be free of limiting provisions.
- The issuer must have agreements with both NSDL and CDSL for depository services.
Step by Step Guide to SME IPO Listing Process
The steps involved in issuing an SME IPO are detailed below.
- Step 1: The IPO process starts with the selection of a Merchant Banker, who becomes the lead manager. The merchant banker handles compliance, due diligence, and drafting of the offer document.
- Step 2: The company work with the Merchant Banker to oversee capital structure and performs financial audits, legal checks, and regulatory adherence as part of due diligence.
- Step 3: The issuing company then appoint Registrars, Bankers, Market Makers, and Registrar and Transfer Agents (RTA).
- Step 4: Next, the company prepares a DRHP that includes financial statements, its business model, potential risks, and critical details for investors.
- Step 5: The DRHP is submitted to the stock exchange and SEBI for evaluation. They both review the document to verify its compliance with applicable regulations.
- Step 6: The company can continue with the IPO process after obtaining consent from the stock exchange and RoC.
- Step 7: With guidance from the Merchant Banker, the company sets the price of the shares, considering its valuation and market conditions. In a fixed-price offering, the share price is disclosed to investors before the IPO takes place. In a Book Building Issue, the issuer sets a price range or a 20% range for investors to place bids on shares, with the final price determined once the bidding is concluded.
- Step 8: The company and the Merchant Banker conduct promotional activities, such as roadshows and advertising, to attract investors and ensure the IPO is successfully subscribed.
- Step 9: The public issue subscription window opens, giving investors a chance to apply for shares through a Demat Account. This period is usually active for a few days.
- Step 10: After the subscription period concludes, the issue is closed, and shares are allocated according to demand and allotment guidelines, with the final list of allottees prepared in line with SEBI regulations.
What are the Benefits of an SME IPO?
The key advantages of an SME IPO from the company’s perspective are:
- Post-IPO, the company must comply with various regulatory requirements, including periodic financial disclosures, corporate governance norms, and other SEBI regulations.
- An SME IPO allows businesses to raise capital from public investors. The issuer can use the funds for expansion, improving infrastructure, and boosting operational efficiency.
- Going public through an SME IPO improves a company’s visibility in the market. This brand recognition attracts potential customers, business partners, and investors and establishes the issuer as a credible player in its industry.
- The funds raised from an SME IPO improve a company’s financial stability. With a more robust balance sheet, the company can invest in growth opportunities, repay debt, or improve working capital management, which in turn can strengthen its long-term business position.
- Listing on an exchange brings credibility to the company. It undergoes scrutiny and audits, ensuring its transparency in operations. This builds trust with stakeholders such as customers, suppliers, and investors.
- Publicly traded shares provide liquidity to shareholders, including company founders, employees, and early investors. They can now sell or transfer their shares more easily.
- Once an SME is listed, it gains easier access to capital markets for future funding needs. The company can raise additional capital through follow-on public offerings (FPOs) or secondary market offerings.
- With an SME IPO, the company’s shares become a valuable currency for potential mergers and acquisitions. The company can use its shares to acquire other businesses or assets.
- Raising funds through an SME IPO enables a company to reduce its dependence on debt financing.
Conclusion
SME IPOs present a unique opportunity for both companies and investors. For businesses, an SME IPO offers the chance to raise funds, grow their business, and enhance their credibility. For investors, it offers the opportunity to be part of an emerging company’s growth story, with potential rewards.
However, before you explore these stocks on the SME IPO Dashboard and invest in them, it is important to understand the eligibility criteria and the listing process to assess whether these investments align with your financial goals and risk tolerance. While they offer exciting prospects, investing in smaller companies requires careful analysis and a deep understanding of the market dynamics.
