What is SME IPO? Meaning, How to Apply?
What is SME?
Before understanding SME IPOs, let’s first learn what SMEs are.
SME stands for Small and Medium Enterprises, which are businesses that fall within a certain size range based on their assets, revenues, or number of employees. The definition and classification of SMEs in India are primarily governed by the Micro, Small, and Medium Enterprises Development (MSMED) Act, 2006.
As per the MSMED Act, SMEs are categorized based on their investment in plant and machinery or equipment (for manufacturing enterprises) and investment in equipment (for service enterprises). The classification is as follows:
- Micro Enterprises:
- Manufacturing Enterprises: Investment in plant and machinery does not exceed Rs. 25 lakhs.
- Service Enterprises: Investment in equipment does not exceed Rs. 10 lakhs.
- Small Enterprises:
- Manufacturing Enterprises: Investment in plant and machinery is more than Rs. 25 lakhs but does not exceed Rs. 5 crores.
- Service Enterprises: Investment in equipment is more than Rs. 10 lakhs but does not exceed Rs. 2 crores.
- Medium Enterprises:
- Manufacturing Enterprises: Investment in plant and machinery is more than Rs. 5 crores but does not exceed Rs. 10 crores.
- Service Enterprises: Investment in equipment is more than Rs. 2 crores but does not exceed Rs. 5 crores.
It is important to note that the MSMED Act also considers the turnover of enterprises for classification. If an enterprise crosses the investment limits specified for its category during the current financial year, it will move to a higher category. Similarly, if it falls below the investment limits, it will move to a lower category.
SMEs play a crucial role in the Indian economy, contributing significantly to employment generation, industrial output, and overall economic growth. The government of India provides various support measures and incentives to promote the growth and development of SMEs, including easy access to finance, subsidies, special schemes, and technology upgradation programs. These initiatives aim to boost the competitiveness of SMEs and enhance their contribution to the country’s economic progress.
SME IPO means the process by which small and medium-sized companies raise capital from the general public by going public and listing their shares on the stock exchange. It allows these smaller enterprises to access the capital markets and gain funding for their expansion and growth.
In contrast to mainboard IPOs, which are usually undertaken by larger, well-established companies, SME IPOs are designed specifically for smaller businesses. These SME IPOs are listed on a separate platform rather than the main exchange where larger IPOs are listed.
Here are some key points regarding SME IPOs:
- Eligibility Requirements: To be eligible for an SME IPO, the company must meet certain criteria, which are generally less stringent compared to the requirements for regular (Mainboard) IPOs. The specific eligibility criteria may vary based on the stock exchange’s rules, but common criteria include:
- The company’s post-issue paid-up capital should be less than a certain threshold, often around 25 crores.
- The net tangible assets of the company should be above a certain value, often around 1.5 crores.
- The company must have an official website.
- The company should facilitate trading in dematerialized securities (Demat).
- The company must be incorporated under the relevant Companies Act.
- Promoter Lock-in Period: After applying for an SME IPO, the promoters of the company are typically required to maintain their shareholdings unchanged for a specified period, usually one year, to ensure stability and commitment to the business.
- Investor Participation: Similar to regular IPOs, SME IPOs are open to both retail and institutional investors, allowing them to subscribe and invest in the shares of the SMEs going public.
- Lower Regulatory Compliance: SME IPOs generally involve lesser regulatory compliance requirements compared to mainline IPOs, making it more accessible for smaller companies to enter the stock market.
- Listing on a Separate Platform: SME IPOs are listed on a dedicated platform of the stock exchange, specifically created for small and medium-sized enterprises. This platform provides better visibility and opportunities for investors seeking investment options in smaller companies.
Where do the SME IPO get Listed ?
SME IPOs are listed on two different exchanges in India:
- BSE SME: The BSE SME platform, launched in 2012, is operated by the Bombay Stock Exchange (BSE) and is dedicated to providing SMEs with a platform to raise capital through an initial public offering (IPO). It offers a separate marketplace specifically designed for small and medium-sized enterprises.
- NSE Emerge: The NSE Emerge platform, launched in 2013, is operated by the National Stock Exchange of India (NSE). Similar to BSE SME, NSE Emerge provides SMEs with an exclusive platform to list and trade their shares after conducting an IPO.
SME IPO Listing Procedure
SME IPO Listing procedure is broadly divided into the following steps:
- Planning: The Issuer Company engages the services of a Merchant Banker/s in an advisory capacity to assist with the IPO process.
- Preparation: The Merchant Banker conducts a thorough due diligence of the Company. This involves reviewing all relevant documentation, including financial statements, material contracts, government approvals, and details of the promoters. Based on this analysis, the Merchant Banker collaborates with the Issuer Company to plan the IPO structure, determine the number of shares to be issued, and assess the financial requirements for the public offering.
- Process: Application Procedure:
- Submission of DRHP/Draft Prospectus: The Merchant Banker prepares the Draft Red Herring Prospectus (DRHP) and files it with the relevant Exchange (BSE or NSE) and the Securities and Exchange Board of India (SEBI) according to regulatory requirements.
- Verification & Site Visit: The Exchange (BSE/NSE) reviews and verifies the submitted documents. Additionally, an official from the Exchange conducts a site visit to the company’s premises to ensure compliance with the necessary norms and standards. During this phase, the Promoters are also interviewed by the Listing Advisory Committee to address any queries or concerns.
- Approval: Upon satisfactory verification and evaluation, the Exchange (BSE/NSE) grants an “In Principle” approval for the IPO, subject to the Issuer Company fulfilling all the stipulated requirements.
- Filing of RHP/Prospectus: The Merchant Banker files the Revised Herring Prospectus (RHP) with the Registrar of Companies (ROC), indicating the opening and closing dates of the public offering.
- Intimation to the Exchange: Once the ROC approves the RHP, they notify the Exchange (BSE/NSE) regarding the IPO’s opening and closing dates, along with the necessary documentation.
- Public Offering: The IPO is offered to the public as per the scheduled dates mentioned in the RHP. Investors have the opportunity to subscribe to the shares offered by the Issuer Company.
- Post Listing:
- Finalization of Basis of Allotment: After the IPO subscription period closes, the Issuer Company submits all relevant documents to the Exchange (BSE/NSE) for the finalization of the basis of allotment of shares to investors.
- Listing and Trading Notice: The Exchange (BSE/NSE) finalizes the basis of allotment and issues a formal Notice regarding the Listing and Trading of the company’s shares on the stock exchange.
Throughout the IPO process, the Exchanges (BSE and NSE) play a crucial role in ensuring compliance with regulatory requirements, verifying the authenticity of the documents, and facilitating a transparent and fair public offering. As per Indian regulations, the IPO process undergoes strict scrutiny to protect investors’ interests and maintain market integrity.
Difference between SME IPO and Mainboard IPO
Here are the primary distinctions separating these two kinds of IPOs.
- Company Size:
In a standard initial public offering (IPO), companies are required to have a post-issue paid capital of at least Rs. 10 crores. On the other hand, for an alternate type of IPO, the minimum post-issue paid-up capital is set at Rs. 1 crore, with a maximum limit of Rs. 25 crores. - Validation:
During a typical IPO, the Securities and Exchange Board of India (SEBI) is responsible for validating the Draft Red Herring Prospectus (DRHP) and other essential documents. In the case of the alternative IPO, however, the validation process and other related aspects are overseen by the stock exchange. - Minimum Allottees:
In a regular IPO, the minimum number of allottees required is 1000. However, in the context of an IPO for Small and Medium Enterprises (SME IPO), there should be a minimum of 50 allottees. - Application Size:
For a standard IPO, the application size falls within the range of Rs. 10,000 to Rs. 15,000. In contrast, for IPOs of smaller companies, the application size is larger, specifically Rs. 1 lakh.
FAQ's on SME IPO
SME stands for Small and Medium Enterprises.
SMEs are classified based on their investment in plant and machinery or equipment for manufacturing or service enterprises, respectively.
The categories are Micro Enterprises, Small Enterprises, and Medium Enterprises, each with specific investment thresholds.
SMEs contribute significantly to employment generation, industrial output, and overall economic growth in India.
SME IPO, or Small and Medium Enterprises Initial Public Offering, is the process through which smaller companies raise capital from the public by going public and listing their shares on a stock exchange.
Eligibility criteria may include post-issue paid-up capital, net tangible assets, an official website, facilitation of trading in dematerialized securities, and incorporation under the relevant Companies Act.
SME IPOs are listed on dedicated platforms called BSE SME (Bombay Stock Exchange SME) and NSE Emerge (National Stock Exchange Emerge).
Promoters are typically required to maintain their shareholdings unchanged for one year after the SME IPO.
