Initial public offerings (IPOs) have long been a prominent means for companies to raise capital by offering shares to the public. In recent years, a specialised segment has emerged within the Indian market, known as SME IPOs (small and medium enterprises initial public offerings).
SMEs, or small and medium enterprises, are important for economic growth. They operate between large corporations and startups, driving job creation, innovation, and industry development across sectors like manufacturing and services, supporting both local and national economies.
What is an SME IPO?
SME IPOs, like regular IPOs, are offered by Small and Medium Enterprises to raise capital from the public and list their shares on the stock exchanges. Once the IPO is over, SME stocks are traded on the stock exchange, allowing public investors to buy shares and acquire ownership stakes in the SME.
SME IPO exchanges: Where are they listed?
In India, SME IPOs are primarily listed on two exchanges:
- BSE SME Exchange: Operated by the Bombay Stock Exchange (BSE), this platform facilitates SME IPOs. It provides visibility and liquidity to SMEs.
- NSE emerge: The National Stock Exchange (NSE) operates NSE emerge, another dedicated platform for SME IPOs. It aims to promote the growth of SMEs by providing access to capital markets.
Listing criteria for SME IPO
Here are the key requirements:
1. Incorporation
The SME must be incorporated under the Companies Act, 1956.
If the SME was formed through the conversion of a registered proprietorship, partnership, or LLP, the partnership firm or LLP should have a net worth of at least Rs. 1 crore for the preceding two full financial years.
2. Post-issue paid-up capital
The face value (post-issue paid-up capital) of the SME should not exceed Rs. 25 crore.
3. Net tangible assets
The SME’s net tangible assets should be valued at least Rs. 1.5 crore.
4. Track record
The applicant company seeking listing should have a track record of at least 3 years.
If the SME took over a proprietorship concern, registered partnership firm, or LLP, the combined track record (including the predecessor) should also be at least 3 years.
Alternatively, if the SME lacks a 3-year track record, the project for which the IPO is proposed should be appraised and funded by institutions like NABARD, SIDBI, or banks (other than cooperative banks).
5. Earnings before interest, depreciation, and tax (EBIDTA)
The company, proprietorship concern, registered firm, or LLP should have operating profit (EBIDTA) from operations for 2 out of the 3 latest financial years preceding the application date.
For companies with appraised and funded projects, positive operating profit from operations in the preceding financial year is required.
6. Leverage ratio
The leverage ratio (debt-to-equity ratio) should not exceed 3:1 (relaxation may be granted to finance companies).
7. Disciplinary action and defaults
No regulatory action of suspension of trading against the promoters or companies promoted by the promoters by any stock exchange with nationwide trading terminals.
Directors should not be disqualified or debarred by any regulatory authority.
No pending defaults in payment of interest and/or principal to debenture/ bond/ fixed deposit holders by the applicant company or promoters.
8. Additional criteria for broking companies
Net worth of minimum Rs. 5 crore with profit before tax of at least Rs. 5 crore in any 2 years out of 3 financial years.
SME listing process – How it works
In the Indian securities market, the process of listing small and medium-sized enterprises (SMEs) involves several key steps:
1. Appoint an underwriter
The first step is to appoint an underwriter, who assists the company in determining the offering price and underwrites the risk associated with the IPO.
2. Prepare the DRHP (Draft Red Herring Prospectus)
Following the selection of an underwriter, the company prepares the Draft Red Herring Prospectus (DRHP). This document provides essential information about the company, its business operations, financial performance, and details of the proposed IPO.
3. Submit the DRHP
Once the DRHP is prepared, it is submitted to the regulatory authorities such as the Securities and Exchange Board of India (SEBI) for their review and approval.
4. Advertise the IPO and announce the launch date
After obtaining regulatory clearance, the company advertises the IPO to potential investors. This includes promoting the offering through various channels and announcing the launch date of the IPO.
5. Launch the IPO and allot the shares
On the designated launch date, the IPO is officially launched, and investors are invited to subscribe to the shares. After the subscription period closes, shares are allotted to investors based on the subscription levels and other predetermined criteria.
By following these steps, SMEs can successfully navigate the process of listing their shares on the stock exchange, thereby accessing capital markets to fuel their growth and expansion plans.
Features of SME IPOs
SME IPOs come with distinctive features that cater to the specific needs and characteristics of small and medium enterprises. Some notable features include:
1. Simplified regulatory compliance
SME IPOs streamline the regulatory process, making it more accessible for smaller businesses. The listing requirements are tailored to the size and scale of SMEs.
2. Market visibility
Listing on a stock exchange provides SMEs with enhanced visibility and credibility, potentially attracting more customers, partners, and investors.
3. Institutional support
SME IPOs often receive institutional support and encouragement from regulatory bodies, making the process smoother for these enterprises.
4. Retail participation
SME IPOs are designed to encourage retail investors to participate, fostering a broad investor base.
How do companies benefit from SME IPO?
Companies can derive several advantages from opting for an SME IPO in the Indian securities market:
1. Access to capital
SMEs can raise capital from the public through the IPO process, providing them with funds to fuel their growth initiatives, expand operations, invest in research and development, or pay off existing debts.
2. Enhanced visibility and credibility
Listing on a stock exchange enhances a company's visibility and credibility in the market. It provides recognition and validation of the company's business model, performance, and growth potential, thereby attracting investors and stakeholders.
3. Liquidity for promoters and early investors
SME IPOs offer promoters and early investors an opportunity to liquidate their holdings and realise their investment. By divesting a portion of their stakes through the IPO, they can unlock value and diversify their investment portfolios.
4. Brand building and investor relations
Going public through an SME IPO can serve as a platform for brand building and improving investor relations. The increased transparency and regulatory compliance required of listed companies help in building trust among investors and stakeholders.
5. Currency for mergers and acquisitions
Being listed provides SMEs with a valuable currency for potential mergers and acquisitions. Listed shares can be used as a consideration in M&A transactions, enabling companies to pursue strategic partnerships, acquisitions, or expansion into new markets.
6. Employee incentives and retention
Listed companies often use stock options and other equity-based incentives to attract and retain talent. By offering employees an opportunity to own shares in the company, SMEs can align their interests with those of the company and foster a culture of ownership and commitment.
By leveraging these benefits, SMEs can strengthen their financial position, accelerate growth, and create long-term value for their stakeholders.
Impact of SME IPO
The impact of SME IPOs on the securities market is multifaceted. Firstly, it facilitates the growth of small and medium enterprises by providing them with a vital source of capital. This, in turn, contributes to job creation, innovation, and economic development. They also add diversity to the stock market, allowing investors to explore opportunities beyond large-cap stocks.
Furthermore, the visibility gained through a stock exchange listing can help SMEs build trust among customers, suppliers, and other stakeholders. It opens up avenues for collaboration and expansion, strengthening the overall ecosystem of small and medium enterprises.
IPO vs SME IPO
Let us explore some differences between IPO and SME IPO:
Criteria |
Normal IPO |
SME IPO |
Company size |
Large corporations |
Small and medium enterprises |
Validation |
Stringent regulatory requirements |
Tailored requirements for SMEs |
Minimum allotment |
Higher number required |
Lesser number required |
Application size |
Large application amounts |
Smaller application amounts |
Conclusion
SME IPOs have emerged as a boon for small and medium enterprises in India, providing them with a dedicated platform to raise capital and expand their operations. The streamlined listing criteria, coupled with specific platforms like the BSE SME and NSE emerge, make the process accessible for SMEs, fostering economic growth and development.
Investors looking for growth potential beyond traditional large-cap stocks can explore SME IPOs as a promising avenue. In essence, SME IPOs are not just a financial transaction but a catalyst for the growth and sustainability of the vibrant network of small and medium enterprises.
