SME owners who are planning to raise funds from the BSE SME exchange must first check whether they meet the exchange eligibility criteria or not. BSE SME exchange has clearly defined the SME IPO eligibility criteria pursuant to operational track record, minimum net worth, net tangible assets, profitability requirements, and other aspects.
Let’s discuss 10 key requirements for listing on the BSE SME exchange in detail;
To list on the BSE SME, the company must be incorporated under the Companies Act 1956.
SME owners who are running a sole proprietorship or partnership firm must first convert the business structure into a Public Limited company to be eligible to raise funds through the BSE SME platform. Know more.
Post Issue paid-up capital
Listing on SME exchange requires companies to have post-issue paid-up capital of not more than Rs 25 crore. Post-issue paid-up capital is the total paid-up capital of a company after the IPO is issued.
If the paid-up capital exceeds the limit of Rs 25 crore, the company has to list on the mainboard exchange.
As per the BSE SME exchange criteria, SMEs must have at least Rs 1 crore net worth for 2 preceding full financial years.
If an SME is formed through the conversion of a proprietorship or partnership or LLP firm then also the company must report the net worth of Rs 1 crore for 2 preceding full financial years.
Net worth is the sum of total assets net of total liability a company owes. Net worth will be computed as per the SEBI ICDR Regulations.
The minimum net tangible assets required is Rs 3 crore.
Yes, SMEs desirous to list on BSE SME must report net tangible assets of at least Rs 3 crore or more as per the audited financial statements of the preceding financial year.
Earlier, it was Rs 1 crore but in November 2023, BSE revised the limit to Rs 3 crore.
Company age or minimum Track Record
SMEs seeking to list IPO should have operational existence for at least 3 years. It means that the company must have been operating for the last 3 years or more.
If a company is formed under conversion from Sole proprietorship/ partnership / LLP to a public limited company, then the track record together before and after conversion will be counted for 3 years. Provided that the applicant company seeking listing must have audited financial statements for one full financial year.
If an SME does not have a 3-year track record, but the project for which IPO is proposed is financed by NABARD, SIDBI, Banks, or financial institutions except co-operative banks are even eligible for BSE SME IPO listing. Such companies are required to have 1 year of track record and provide 1 full financial year audited statements for listing.
Profitability Criteria for listing on BSE SME
Do SMEs require profits from operations to raise funds via SME IPO?
Yes, companies having a track record of 3 years but failing to meet the profitability requirements do not qualify for BSE SME IPO. This is because companies must be on a profitable operating basis to bring SME IPO.
The exchange criteria of BSE SME platform requires SME owners/promoters to meet the below conditions to satisfy profitability criteria;
Applicant company/ proprietorship / LLP / partnership firm should have operating profit in the business.
Out of three audited financial years, SMEs must have at least Rs 1 Crore operating profit (EBITDA) from operations for any 2 out of 3 latest financial years before the IPO application is filled.
The applicant entity must have profits from operations for one full latest financial year preceding the IPO application date.
The IPO issuer companies where the project is funded by NABARD, SIDBI, Banks, and other financial institutions, should have profits for one full latest financial year.
Note: Operating profit means earnings before interest, depreciation, and tax.
The leverage ratio of the company is used to examine the use of debt and equity capital to finance business operations.
As far as companies are concerned about the leverage ratio, it should not be more than 3:1. Thus, SMEs maximum debt funding in an SME can be 3 times that of equity capital used.
Finance companies are provided with relaxation and may have a leverage ratio of more than the said limit.
BSE SME platform not only specifies the leverage ratio but also states that the applicant company, its promoters, or promoting and subsidiary companies should not have defaulted in the timely payment of interest and/or principal.
The promoters of the company should not have been suspended from trading activities by the stock exchange.
No regulatory action for suspension of trading activities has been taken against the companies promoted by the promoters.
Promoters and/or directors of the SME company seeking listing should not be the promoters or director of a compulsory delisted company. It is because exchange delist companies or suspend any trading activities due to non-compliance.
The director or promoter should not be debarred or disqualified by any other regulatory authority.
If the company has changed its name in the last one year, at least 50% of the total revenue for the latest 1 full financial year must be earned from the business activities under the new name.
It means that the new business name has contributed to 50% of total revenues in the preceding 1 full financial year on a restated and consolidated basis.
SME IPO Offer for Sale
If promoters are selling their shareholding in the company, the following rules will be applicable:
SME IPO via OFS is restricted to a maximum 20% of the IPO issue size.
Selling shareholders cannot sell more than 50% of their shareholding in the company.
Restrictions on use of funds raised through SME IPO
The issuer company cannot use funds raised to repay promoter loans.
Funds to be used to meet general corporate purposes is capped at 15% or Rs 10 crore, whichever is lower.
The applicant company should have a functional website.
All of the promoter’s shareholding must be in the demat form.
Promoters minimum contribution is locked in for 3 years, and 50% of excess of minimum promoter contribution is locked in for 1 year and remaining 50% is locked for 2 years.
Prior to listing, SME should enter into depository agreements with NSDL or CDSL to facilitate trading of shares in the dematerialized form.
The company’s promoters should not be changed in the preceding one year from the date of the IPO application filed to the BSE SME.
he board composition must comply with the Companies Act 2013.
SMEs desirous of listing IPO should not have been referred to NCLT under IBC.
No winding-up petition was filed against the company.
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Frequently Asked Questions
Can HUF and LLP issue SME IPO?−
No, only a public limited company that is incorporated under the companies act 1956 or 2013 in India is eligible to raise capital through SME IPO. Hindu Undivided Family (HUF) and Limited Liability Partnership (LLP) desirous to list securities on the SME platform must be converted into a public company to be eligible to issue equity shares to the public.
Who is eligible to issue SME IPO?+
Any small and medium size entity who meets the following conditions is able to issue its SME IPO.
3 years of operational track record
Post-issue paid-up capital is maximum Rs 25 crores
Profitable business and positive net worth in any 2 of last 3 years
What should be the net tangible assets to list on the NSE Emerge?+
There is no condition regarding the net tangible assets to issue an SME IPO to list securities on the NSE SME platform. However, an SME proposing to list shares on the BSE SME segment must have net tangible assets worth Rs 3 crore.
Can broking companies list on the BSE SME platform?+
Yes, as per the BSE circular in April 2017, Stock or commodity Broking companies and Micro Finance companies are eligible to get listed on the SME platform of BSE provided that they meet the eligibility criteria.
BSE SME Eligibility criteria for broking companies
Net worth and Profitability: Minimum net worth of Rs 5 crore with profit before tax of Rs 5 crore in any two out of three financial years, OR minimum net worth of Rs 25 crores in any 3 out of 5 financial years
The broking company must have net tangible assets of at least Rs. 3 crores as per the audited financial results.
The entity’s post-issue paid-up capital must be at least Rs. 3 crores.
What are the key requirements for SME IPO listing?+
Listing on SME exchange either BSE SME or NSE Emerge has several conditions or prerequisites.
Whether an SME Company is a sole proprietorship, partnership, or public or private company, it is mandatory to satisfy the key criteria while filling SME IPO application to exchange.
Paid-up capital: Whether an SME owner wants to list securities on NSE SME or BSE SME, the post-issue paid-up capital should not be more than Rs 25 crores.
Company’s operating existence: SME must be in existence for at least 3 years. Thus, an SME who does not have 3 years of operational track record is not eligible for an SME IPO.
Rs 1 crore of minimum Operating profit: Both the BSE and NSE SME platforms require SMEs to be on a profitable basis or have positive EBITDA of at least Rs 1 crore for any 2 of the last 3 financial years.
Net worth: SME IPO Listing requires SMEs to have positive net worth. To list on a BSE SME, the company must report a net worth of at least Rs 1 crore.
What are the extra compliance requirements for SME IPOs compared to the main board listing?+
Unlike main board IPOs, SME IPOs have a certain set of additional requirements regarding underwriting, market making, etc. to be eligible to issue an IPO. The additional compliance requirements for SMEs listing are as follows:
100% underwriting of the SME IPO issue.
15% underwriting should be done from the merchant banker’s account.
Merchant bankers have to undertake market-making for a period of 3 years.
Can a newly incorporated SME issue IPO?+
No, a newly incorporated company cannot issue SME IPO. The eligibility criteria of the SME exchange at BSE and NSE require an SME to have atleast 3 years of operating history to launch SME IPO in the market. A newly incorporated SME who has not yet completed 3 years since its incorporation is not eligible to offer shares to the public via IPO.
What are the key financial parameters for SME to list on BSE SME?+
Eligible SMEs can issue their IPO and become listed SME companies whose shares are traded on the SME exchange either BSE SME or NSE SME.
BSE SME IPO Financial Requirements
Post issue paid up capital below Rs 25 crores
Out of last 3 years, SME business must be earning operating profit in any 2 years.
Net worth should be at least Rs 1 crore in any 2 years of the last 3 financial years.
Net tangible assets should be a minimum of Rs 3 crore.
Leverage ratio within maximum permitted limit of 3:1 (except for financial companies).
No default in payment of debt principal and interest thereon.
Should SMEs be profitable to go public?+
Yes, having operating profit is the key requirement for SMEs listing on the exchange. Thus, loss-making companies in the last few years are not eligible to issue SME IPOs.
After the new norms by SEBi on December 19, both the SME platforms i.e., NSE Emerge and BSE SME’s eligibility norms requires SMEs to have minimum Rs 1 crore of operating profit in any 2 of the last 3 preceding financial years to become a listed SME company
What are the differences in the eligibility norms for SME IPO at BSE and NSE?+
BSE and NSE Emerge have some differences in the eligibility criteria relevant to net worth, net tangible assets, leverage ratio, etc. to launch an SME IPO in India.
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