What is SME IPO? How Does it Work & Eligibility Criteria

What is SME IPO?

SME IPO refers to the Initial Public Offering (IPO) specifically designed for Small and Medium Enterprises (SMEs). It provides a tailored avenue for smaller businesses to raise capital by offering shares to the public and getting listed on a stock exchange. The design and characteristics of SME IPOs take into consideration the unique needs, scale, and challenges faced by smaller enterprises.

One might wonder, why do businesses choose to get listed on an SME IPO? There are specific reasons behind:

1. To increase credibility and visibility.
2. To signal the investors that the company has achieved maturity to a certain level.
3. To raise significant capital by selling shares to the public.
4. To receive more media coverage and attention. 

Some examples of where businesses choose to get listed are: National stock exchange, regional stock exchange, alternative investment markets, and so on. 

However, businesses have to assess the listing requirements, investor base, and visibility offered by different exchanges before getting listed on a stock exchange platform. 

How SME IPOs Serve the Small Business Community?

SME businesses often look to avoid the stringent listing requirements and aim for simplified ones. Unlike a regular IPO, SME IPOs are perfectly tailored for their needs.

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But why do SME seek less stringent listing requirements?

Often larger companies that go for regular IPOs typically need to meet stringent financial eligibility criteria, including minimum profitability, revenue, and net worth requirements.

But SMEs face challenges accessing the capital market. Due to having less resources, they struggle to meet IPO’s financial and compliance requirements. This makes the whole listing process complicated overall. 

Thankfully, SME IPOs have less stringent listing criteria that makes it a perfect option for small businesses. 

• Has more lenient financial eligibility criteria.
• Shorter track record requirements
• Less rigorous corporate governance standards 
• Still maintains essential investor protections.
• Have a more flexible public shareholding requirement

It is literally a tailor-made opportunity for small businesses that considers both their financial and compliance capabilities.

So, How Does SME IPO Work ? - Listing Process 

Here's a general overview of how an SME IPO typically works and what you need to do:

1. Assess Your Readiness for an SME IPO

Take the assistance of financial advisors and underwriters. Evaluate your business’ financial health, track record, and compliance with regulatory requirements.

Make sure that your business meets eligibility criteria of the stock exchange platform where you want to get listed on. 

2. Appoint an Underwriter

To apply for an SME IPO, you need to make sure you have all the IPO-related documents prepared. Thus, hiring an expert in the area of finances and banking could be a wise investment. 

Often an expert from an investment bank has all the knowledge you need for this step. He or she can underwrite essential business data such as:

•  Face value
• Selling price
• Market evaluation
• Other financial data

3. Prepare the Draft Red Herring Prospectus (DRHP)

Your hired underwriter will then create a DRHP (Draft Red Herring Prospectus). This allows potential investors to check out your company’s background details like financial data and market evaluation. 

This enables them to make sound investment decisions towards your small business. 

4. Submit the DRHP

Submit your underwritten DRHP to the Stock Exchange platform and wait for their approval.

Usually large businesses have to submit DRHP to the Securities and Exchange Board of India (SEBI) and wait for verification.

However, this step has been made simpler for the SMEs. Thanks to the SME IPO’s less complicated process.

5. Market and Attract Potential Investors

If you’ve come so far just to read this section, then we’re guessing that you’re waiting to have your draft approved.

Once its approved, your hired underwriter will then:

•  Add your IPO’s opening and closing dates.
• Launch on a specific date.
• Add IPO issue price.

This signifies that it's time you market about your IPO to potential investors. Let them know about your investment opportunity by conducting marketing activities.

Eligibility Criteria

Many stock exchanges require companies to demonstrate a track record of profitability over a certain period. Small businesses may need to meet a minimum net worth requirement set as an eligibility criteria. 

The eligibility criteria for an SME to obtain a listing on the stock exchange platform is:

• Must be legally incorporated as a company under the Companies Act, 1956.
• Your post-issue paid-up capital face value should not exceed ₹25 Crore.
• Should possess net tangible assets valued at a minimum of ₹1.5 Crore.
• Must have a track record of at least three years (if formed by converting partnership/proprietorship/LLP firms).
• Should maintain a website, enhancing transparency and information accessibility.
• Your promoters’ stability should remain unchanged for at least one year post-filing of the IPO.
• You must agree to trade its securities in dematerialized (Demat) form.
• Should enter into a contractual arrangement with depositories, facilitating electronic securities holding.

Difference Between SME IPO and Regular IPO

By now you should be clear about how SME IPOs are a favourite option for small businesses out there.

How to Invest in SME IPOs?

Here’s how you can invest in an SME IPO:

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1. Create a Demat account using Go Pocket. 

Enter your Pan Card details. 

Enter Aadhar Card details

Then connect your existing bank details which will be used to fund transfer while trading. 

2. Upload the essential documents it asks you, followed by an E-signature. 
3. Select the “SME IPO” section.
4. Find a specific IPO you’re interested in.
5. Enter the number of shares (lot) you want you to apply for.
6. Make the payment via UPI or your linked bank account.

Once the payment is done, keep track of the SME IPO allotment status. It is usually available on the website of the registrar to the IPO or the stock exchange. Upon allotment, the number of shares will be credited to your Demat account.

Tips for SME Considering SME IPO

One of the best ways to proceed with SME IPO is to consider investors’ expectations first:

• Strong cash flow
• Thorough risk disclosures
• Clear communication on how funds raised in the IPO will be utilized 
• Your long-term vision and strategic plan
• Clearly defining the company's dividend policy

When you understand investors’ expectations you are likely to attain the following benefits:

• Increase the likelihood of attracting investment.
• Contribute to a positive market reputation.
• Experience better stock performance.
• Reduce stock price volatility.
• Have easier access to capital.

As a small business you can make strategic decisions aligned with investor expectations. This includes capital allocation, expansion plans, and operational improvements that resonate with the company's investors.

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FAQs on SME IPO

What is an SME IPO?

An SME IPO is an Initial Public Offering tailored for Small and Medium Enterprises, enabling them to raise capital by issuing shares to the public, fostering growth and market expansion in a regulated environment.

Is it good to apply for an SME IPO?

Applying for an SME IPO can be advantageous for investors seeking early-stage investment opportunities in promising smaller enterprises, potentially providing returns as the companies grow.

Is it difficult to sell SME IPO shares?

Selling SME IPO shares is generally straightforward once listed on a stock exchange, offering liquidity. However, the ease of selling can be influenced by market conditions, demand for the shares, and overall trading dynamics.

Which brokers allow SME IPO?

Many brokerage firms participate in SME IPOs. Investors can check with their preferred brokers or those affiliated with the stock exchange where the IPO is listed for seamless application and subsequent trading services.