What is SME IPO and How to Apply?

What Is an SME?

SMEs or Small and Medium Enterprises are businesses that have their assets, revenues, assets, or number of employees lower than a specific cut-off level. In India, SMEs are significant contributors to the economy and can be in any segment, such as manufacturing or services. 

The biggest challenge an SME faces is access to capital. To solve this problem, they often use an SME IPO to raise capital from the stock market.

What is an SME IPO?

SME IPOs are initial public offerings or IPOs issued by SMEs. While a normal or mainboard IPO requires the company to follow certain guidelines in terms of the size of the company, those guidelines and certain others are more relaxed in the case of SME IPOs. This allows even smaller companies to access capital directly from the public in the stock market.  Once the IPO allotment gets over, the SME stock gets listed and starts being traded in the stock exchange, but on a separate platform dedicated to SMEs. SME IPO is an extremely popular way for a company to gather funds from various investors and be listed.

Features of SME IPOs

An SME has to announce an IPO at an SME platform during an exchange before the stocks can get listed and traded or exchanged. The post-issue paid-up capital of the SME should not exceed ₹25 crore. Eligibility requirements for SME IPO company directors, promoters, investors, etc., remain the same as for a regular IPO, i.e., the said persons should not be defaulters, offenders or disqualified from accessing the capital markets. The SME platforms of NSE and BSE are NSE Emerge and BSE SME, respectively.

BSE SME Eligibility Requirements

1. The company must be incorporated under the Companies Act, 1956.
2. The company should have a positive net worth.
3. The requirement for Net Tangible Assets is now ₹3 crore from ₹1.5 crore earlier (for BSE SME listings) to filter for higher-quality companies. 
4. The company should have a track record of operations of a minimum of 3 years. If not, the company should have been funded by banks/financial institutions/central government or state government or the group company, which should be listed for a minimum of 2 years on either the main board or SME board of BSE. It should have positive cash accruals (earnings before depreciation and taxes) in any year of the last 3 years.
5. The company should have a website.
6. The company should facilitate trading in Demat form and also have an agreement with both Indian depositories CDSL and NSDL.
7. The list of promoters should not have changed in the preceding year from the date of applying to BSE for listing under the SME segment.

There are also additional criteria for microfinance companies and broking companies in BSE SME.

NSE Emerge Eligibility Requirements

1. The company should be incorporated under the Companies Act 1956/2013.
2. The company or the promoters/promoter company should have a track record (operations) of at least 3 years. If it is a proprietary/partnership firm converted into the present company, then there should be a minimum 3-year track record of the firm.
3. The company should have operating profit in at least 2 out of 3 fiscal years and also have positive net worth.
4. There should be no pending Board for Industrial and Financial Reconstruction (BIFR), insolvency or bankruptcy proceedings against the company or promoters.
5. The company should not have received any winding-up petition from NCLT/Court.

There are additional requirements in terms of disclosures and merchant banker requirements. If an application is rejected, the SME cannot apply for at least the next 6 months for an IPO. The minimum application and trading lot size shall not be less than ₹1 lakh.

Also Read, Difference Between NSDL and CDSL 

Difference between SME IPO and Mainboard IPO

There are two types of IPO commonly:

1. Mainboard IPO
2. SME IPOs – Small and medium enterprises

If small and medium enterprises want to raise money from the public they will have to file for an IPO either on the SME platform of BSE or Emerge platform of NSE.

Points to remember:

1. Investors/traders wanting to sell SME shares need to sell in lots or multiples of lots.
2. Investors/traders can sell only on the exchange where the particular SME shares are listed. For example, they cannot sell shares listed on the BSE in the NSE, or shares listed on the NSE in BSE.

Also Read, Difference between NSE and BSE 

How To Apply for SME IPOs from Angel One?

To apply for an SME IPO, take the following steps:

1. Open the Angel One App and click on ‘IPO’ on the Home Page.
2. Check for the ‘SME-IPO’ tag in the IPO list, given in the ‘Open IPOs’ section. This will give you an idea about the SME IPO list.
3. Click on ‘APPLY NOW’ and enter the number of lots and bidding price along with your UPI ID.
4. Confirm your bid and accept the payment mandate sent to your UPI App for successfully completing the IPO application.
5. You can later check the SME IPO allotment status under ‘IPO Orders’.

Please note that direct selling of allotted shares under the SME category is allowed from our online application.

Impact of SME IPO

Numerous startups need capital for growth. While major startups have multiple options, like taking the aid of private equity investors to get more funds, the small ones have fewer options available. In this case, a platform created with such companies in mind would help both these companies as well as the investors immensely. While the companies listed on the SME platform are becoming more influential, they are attracting more investors. Another reason for an increase in the number of investors who invest in SMEs is the rapidly multiplying number of SME stocks and increased returns. With such support from the exchange board and the investors, the Indian market seems to be good for SME-IPOs. In India, such SMEs are important for the growth of the nation, and increased employment opportunities.

How does SME IPO listing work?

SEBI has approved a set of regulations for SME IPO listing that differs from a mainstream listing. Here are the key conditions that SMEs need to fulfil to complete the listing process.

1. Appointment of merchant banker: The requirement to appoint a merchant banker is the same for SMEs. SMEs need an SME IPO consultant to guide them with the listing process.
2. Compliance and due diligence: The next step involves ensuring all data, financial facts, and accounts reflect the company’s truth. It confirms that there is no discrepancy in data that can impact the company’s story.
3. Filing Red Herring prospectus: Like a mainstream IPO, SMEs must also file a red herring draft prospectus. It contains comprehensive information on the operations and the prospects of the company. The RHP serves as a guide for prospective investors.
4. Verification and feedback: All data and documents submitted during the prospectus filing undergo verification to eliminate chances of discrepancies and misinformation. Site verification is done at this stage as well.
5. In-principle approval: The SME is given an in-principle consent subject to fulfilling additional conditions. The company needs to satisfy all criteria before opening the public offer.
6. Opening the issue: After completing due diligence and receiving approval, the offer begins for investors to bid. The public offer remains open for a few days before closing.
7. Listing and trading of shares: It takes about a week to complete the listing process on the bourses. Once the scrips are listed and allotted, investors can start trading them in the secondary market.

From appointing a merchant banker to listing IPO shares, the process is long drawn out and involves extensive paperwork. As an investor, it benefits you to understand how the IPO share listing process works. The lot size and the issue price are decided based on an initial evaluation of market trends and investors’ interest. 

Conclusion

SME IPOs are a great way to benefit from the growth of small and medium enterprises. Be sure to assess the risk involved, as these are still early-stage companies. If you are new to IPO investing, open a Demat account for free with Angel One, India’s trusted broker!