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. The criteria of what is categorised as an SME depends on the country and the industry. Governments from all over the world have realised the vital role SMEs plan in their economy. It is the same for India too, where SMEs are significant contributors to the economy. In India, SMEs employ almost half the workforce. But due to various factors, SMEs show poor productivity in India. The biggest challenge an SME faces is access to capital, and finance is also the primary reason for it going out of business.
What is SME IPO?
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. The criteria of what is categorised as an SME depends on the country and the industry. Governments from all over the world have realised the vital role SMEs plan in their economy. It is the same for India too, where SMEs are significant contributors to the economy. In India, SMEs employ almost half the workforce. But due to various factors, SMEs show poor productivity in India. The biggest challenge an SME faces is access to capital, and finance is also the primary reason for it going out of business.
Features of SME IPOs
A company has to announce an Initial Public Offer (IPO) at an SME platform during an exchange before the stocks can get listed and be traded or exchanged. SME-IPO is an extremely popular way for a company to gather funds from various investors and be listed. The SME-IPO investors have earned huge returns.
These are some of the criteria for SME IPO in India -
- The company must have a capital of Rs 3 crore that has been paid up. It should be the same for the net worth and the tangible assets too.
- Companies should be able to show that they have distributable profits for at least two of the preceding three financial years (excluding extraordinary income). This is following the terms of the Companies Act 2013, Section 124.
- As dictated by the guidelines of SEBI, depending on the price bracket, the minimum trading lot for SME IPOs ranges from 100 to 10,000. These are reviewed regularly and revised, depending upon the movement of its price after the listing.
Difference between SME IPO and Main board IPO
There are two types of IPO commonly:
- Mainboard IPO
- 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.
SME IPO | Mainboard IPO |
Post-issue paid up capital of SME companies should be between Rs. 1 cr - Rs. 25 cr. | For mainboard IPO it is minimum Rs. 10 crore. |
Application size is greater than Rs. 1 lakh for 1 lot. | Ranges between Rs. 10,000 - Rs. 15,000. |
IPO underwriting is mandatory (100% underwritten with Merchant Banker underwriting 15%) | IPO underwriting is not mandatory (Under 50% compulsory subscription to QIB's) |
Stock exchange vets the offer document | SEBI vets the offer document |
3-4 months of IPO time frame | 6 months of IPO time frame |
Can’t sell shares individually. Need to sell the entire lot. | Can sell shares individually on the secondary market. |
Companies need to half-yearly report mandatorily. | Companies need to Quarterly report mandatorily |
Minimum No. of allottees should be 50. | Minimum No. of allottees should be 1000. |
Impact of SME IPO
SEBI is about to extend leniency to startups so that they can enlist on the SME platform and state their requirements of net worth and profitability. The principle that dictated this step was a desire to provide more opportunities to modest startups that are unable to list on the main board.
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 to apply for SME-IPOs from Angel One?
You can now apply for SME IPOs (i.e. IPOs of small and medium enterprises) within the limit of ₹ 2 Lakhs through UPI under the retail category via our applications.
Please refer to the below link for list of approved UPI application for SME IPO-
https://www.npci.org.in/what-we-do/ipo/live-partners
Also, please note that direct selling of allotted shares under the SME category is allowed from our online application.
If the client wants to sell SME shares, he needs to sell a lot.
Clients can sell only on the exchange where the SME shares are listed, client cannot sell BSE listed lot
on NSE and NSE listed lot in BSE.
Points to remember:
- Investors/traders wanting to sell SME shares need to sell in lots or multiples of lots.
- 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.
What’s in it for startups?
Now that we have understood what is SME-IPO meaning, let us look at the benefits it has. All over the world, the IPO market has been taken by a storm, thanks to the new class of social media, mobile technology and e-commerce companies making their debut. But, the scenario is slightly different in the Indian market. Although companies like Snapdeal, Paytm and Flipkart have been selling their products in India, they choose to list overseas. Seeing this trend, SEBI felt that interested companies would completely ignore Indian investors. So, a platform for startups has been set up, the Institutional Trading Platform. A variety of different start-ups can now list and trade shares through The Institutional Trading Platform, without going through the IPO process
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.
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.
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.
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.
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.
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.
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.
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 work. The lot size and the issue price are decided based on an initial evaluation of market trends and investors' interest. After listing, the stocks trade like regular shares, and their value fluctuates based on market demands.
