What is SME IPO? Meaning, Eligibility Criteria and How it Works

The SME sector is one of the fastest-growing sectors in our economy, contributing approximately 6.11% to the manufacturing GDP and 24.63% to the service sector GDP. This robust growth has made the sector attractive to various categories of investors and has created excellent IPO opportunities for SMEs. BSE and NSE have separate segments for SMEs and have seen an increasing number of SMEs listed to take advantage of the market opportunities. So what is an SME IPO, and what makes it different? Here are the answers to these questions and more on SME IPOs. 

What is an SME IPO?

An SME IPO (Initial Public Offering) is a process through which Small and Medium enterprises (SMEs) offer their shares to the public for the first time. This allows SMEs to raise capital from investors to expand their business or achieve other goals, such as improving infrastructure or repaying debts. 

SME IPOs are listed on specialised platforms of BSE and NSE - BSE SME, or NSE Emerge, respectively. The eligibility for SME IPOs is quite relaxed compared to that of mainboard IPOs, making it easier for SMEs to access capital markets and maximise their growth potential. 

Eligibility Criteria for SME IPO

The SME IPO eligibility is per the SEBI guidelines, and some of the key highlights of SME eligibility are mentioned hereunder. 

Post Issue Capital

• The minimum post-issue capital for SME IPOs must be Rs.3 crore.

• The maximum post-issue capital is Rs. 25 crore.

Track Record Requirements

• Net Tangible Assets: The company should have net tangible assets of at least Rs. 1.5 crore.

• Net Worth: The net worth should be Rs 3 crore.

• Profitability: The SME must show distributable profits for at least two out of the preceding three financial years or maintain a net worth of at least Rs. 5 crore. 

• Cash Accruals: Before applying, the company should have had positive cash accruals (EBIT) from operations for at least two financial years and a positive net worth.

Other Requirements

• Demat Securities - Trading in dematerialised securities must be facilitated.

• Corporate Website - The SME should have a corporate website.

• Promoters’ Interview - Promoters must attend an interview with the Listing Advisory Committee.

• Stability - No change in promoters within the preceding year.

• Legal and Regulatory Compliance - There should be no winding petition or reference to the Board for Industrial and Financial Reconstruction (BIFR).

Key SEBI Norms for SME Listing

• Public Shareholding - A minimum of 25% public shareholding is required.

• Minimum Subscribers in IPO - At least 50 investors.

• Minimum Application Amount/Trading Lot - Rs. 1,00,000.

• Underwriting - 100% mandatory underwriting, with 15% by the merchant banker.

• Market Making - This should be done through exchange-registered market makers for at least three years.

SME Listing Process – How Does it Work?

The listing process of an SME IPO is similar to any other IPO and is regulated by SEBI and stock exchange guidelines. The key components or steps in the SME IPO listing process are highlighted here.

Pre-Listing Preparations

The first step is to appoint an SEBI-registered merchant banker or underwriter to guide the company through the listing process. The underwriters conduct due diligence by reviewing the company’s financials, legal matters, and business operations to ensure compliance with regulations. A draft Red Herring Prospectus (DRHP) is prepared with details of the company’s information and filed with the stock exchange.

Approval and Documentation

SEBI and the stock exchange review the DRHP and may provide feedback or request additional information. The company must address these observations and submit an RHP (Red Herring Prospectus) accounting for the input and recommendations. 

Marketing and Roadshows

The company and the underwriters conduct marketing campaigns and roadshows to attract potential investors for the IPO. This includes presentations and meetings with institutional investors, analysts, and retail investors to generate interest and explain the investment opportunity.

IPO Launch

The IPO is launched for 3-7 business days, during which investors bid for shares in the SME IPO within the set price band. Once the IPO window closes, the bids are accumulated under each investor category for optimum allocation based on demand.

Allotment and Listing

After the subscription period ends, shares are allotted to investors according to the demand accounting for oversubscription or undersubscription of the IPO. The company’s shares are then listed on the SME platform of the stock exchange (BSE SME and NSE Emerge) for trading.

Post-Listing Compliance

Once listed, the company must comply with continuous disclosure requirements, such as quarterly financial results, annual reports, and other material information. Additionally, the company must ensure market makers are available to provide liquidity for its shares for at least three years, maintaining an active and stable market for its stock.

Features of SME IPOs

Under the SEBI guidelines, SME IPOs are considered a separate category and are listed on a specialised platform on the BSE and NSE if they meet the SME IPO criteria. Here are the top features of SME IPOs that make them distinct from regular or mainboard IPOs.

• The company's post-issue paid-up capital should not exceed Rs. 25 Crore, ensuring the platform remains exclusive to small and medium-sized enterprises.

• SME IPOs must be 100% underwritten by merchant bankers, providing a safety net by ensuring the issue is fully subscribed.

• Promoters must hold 20% of the post-issue equity for a specified lock-in period to ensure their commitment to the company's growth post-IPO and the company's stability.

• The SME IPO category has simplified eligibility and regularity overview as compared to mainboard IPOs making it easier for SMEs to be listed and access fresh capital. 

• The costs associated with listing on SME platforms are lower than those on the main stock exchanges, making it more accessible for SMEs.

Conclusion

SME IPOs are often a good investment opportunity for aggressive or growth-oriented investors with a long-term investment horizon where they can benefit from wealth creation opportunities in the long term from SME IPOs, but after conducting due diligence.