SME IPOs

SME IPOs are issued by Small and Medium Enterprises when private funding is not enough, allowing them to raise money from public investors like regular IPOs.
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SME IPOs
3 mins
25-February-2025

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?

Small and Medium Enterprises (SMEs) use SME IPOs, similar to regular IPOs, to raise capital from public investors when they can't secure enough private funding. After the IPO process is complete, the SME's stock begins trading on the stock exchange, allowing public investors to purchase shares and become part-owners of the company.

Current SME IPOs

Company Name

Open

Close

Tejas Cargo India Limited

14 Feb

18 Feb

Royalarc Electrodes Limited

14 Feb

18 Feb

Shanmuga Hospital Limited

13 Feb

17 Feb

L.K. Mehta Polymers Limited

13 Feb

17 Feb

Maxvolt Energy Industries Limited

12 Feb

14 Feb

Voler Car Limited

12 Feb

14 Feb

PS Raj Steels Limited

12 Feb

14 Feb

Chandan Healthcare Limited

10 Feb

12 Feb

Eleganz Interiors Limited

07 Feb

11 Feb

Solarium Green Energy Limited

06 Feb

10 Feb

Readymix Construction Machinery Limited

06 Feb

10 Feb

Amwill Healthcare Limited

05 Feb

07 Feb

Ken Enterprises Limited

05 Feb

07 Feb

Chamunda Electrical Limited

04 Feb

06 Feb

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SME IPO – Eligibility criteria

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.

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Frequently asked questions

What are the advantages of investing in SME IPOs?

SME IPOs (Initial Public Offerings) enable small and medium-sized enterprises to raise capital from public investors by issuing shares for the first time on a dedicated stock exchange platform. These IPOs provide access to funding for companies that may not qualify for a main board listing.

Are SME IPOs a safe investment option?

SME IPOs are subject to significant regulatory oversight by SEBI and stock exchanges, which enhances their safety. However, investing in SME IPOs carries a higher degree of risk compared to established companies, making them a more appropriate choice for investors with a higher risk tolerance.

Is it good to invest in SME IPO?

SME IPOs generally carry a slightly higher risk compared to mainboard IPOs due to less available information about the company's financials, management track record, and overall performance. While some SME IPOs have demonstrated strong long-term performance, the success of any SME IPO investment ultimately hinges on factors such as the company's underlying fundamentals, corporate governance, and prevailing market sentiment.

What is the difference between IPO and SME IPO?

SME and Mainboard IPOs cater to distinct company profiles. SME IPOs serve as a launching pad for smaller businesses seeking public capital injection, while Mainboard IPOs are the domain of established corporations with proven track records, targeting larger funding rounds. This distinction reflects a calculated approach by stock exchanges to segment fundraising opportunities.

Can I sell all shares of SME IPO?

Yes, similar to shares from any public offering, you are free to sell shares allocated to you in an SME IPO on the day they begin trading (the listing day).

Is there any risk in SME IPO?

SME IPOs are generally considered riskier than mainboard IPOs due to less readily available information regarding the company's financial health, management experience, and overall performance history. While some SME IPOs have proven to be successful long-term investments, the decision to invest in an SME IPO depends on a variety of factors, including the company's underlying fundamentals, its corporate governance practices, and prevailing market conditions.

What is the process of SME IPO?

The SME IPO process involves several steps: suitability checks, hiring investment bankers, due diligence, creating an IPO prospectus, marketing and roadshows, pricing the shares, underwriting the IPO, listing on the exchange, and ongoing compliance. While the process is generally straightforward, it needs to be tailored to each company's specific financial situation and market conditions.

What is the full form SME IPO?

SME IPO stands for Small and Medium Enterprise Initial Public Offering.

What are the risks of SME IPO?

Investing in SME IPOs offers the potential to participate in the growth of promising, emerging companies. However, it also carries risks due to the inherent volatility and unpredictability of smaller businesses, their often limited financial history, and potential market illiquidity.

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