No wonder, SME IPO is the best route to raise funds from the public for business expansion. If you are an IPO-ready company and want to take your company on board, but are concerned about the SME IPO process complexities? This article will take you through the step-by-step guide on the SME IPO listing process from appointing advisors to filling draft documents, conducting roadshows, and obtaining exchange approval for your SME IPO. By the end, you will know how to file for an SME IPO and successfully get listed on the BSE SME and NSE SME exchanges.
When privately owned small and medium companies sell their shares to the public to raise the required capital for growth, it is called an SME IPO. The process of listing on SME Exchange involves many credible requirements at the planning, preparation, listing approval, and IPO launch stages. Also, there is a host of post-listing compliance norms for publicly traded SMEs.
Navigating the SME IPO listing process can be tricky, requiring extensive paperwork and due diligence. Here is the detailed 10-step guide explaining the SME IPO listing process.
Assess Your Readiness for SME IPO
Before going public, the first thing to do is check for pre-IPO readiness. The SME IPO readiness assessment includes the following activities;
Get Ready with the IPO team, including company promoters and managers, and hire experienced and reputed professionals, including investment bankers, auditors, and legal advisors, who will guide you throughout the IPO journey.
Analyze and review your SME’'s financial health, internal operational processes, competitive strength, market positioning, and potential to grow to decide if you are ready for the SME IPO
IPO Eligibility Assessment: Check whether your company is eligible for the SME IPO.
Develop a detailed business plan with your financial performance and projections for the future, as well as market analysis and future growth strategies.
IPO team with investment bankers and financial advisors assesses business valuation and determines fundraising requirements
10 Key requirements for SMEs before going public
Ensure to Meet the SME IPO Eligibility Criteria
Once you have the right team in place, prepare yourself to be eligible for SME IPO. This stage may require you to do a lot of work to meet the SME exchange eligibility criteria about profitability, minimum paid-up capital, corporate structure, etc. You must check the respective exchange criteria where you are intend to get listed.
Key Requirements to get listed on SME Exchange include;
The conversion of the Private Limited Company into the Public Limited Company, Know here.
Post-issue paid-up capital of SME shall not exceed Rs 25 crore.
SMEs must be operating for the last 3 years or more. In cases, where a sole proprietorship or partnership firm has been converted into a public limited company, the combined operational track record must be 3 years.
The company must have profit for at least 2 out of the last 3 years.
The net worth of the company should be positive (NSE SME) or a minimum of Rs 1 crore to list on BSE SME.
Check detailed SME IPO eligibility criteria
SMEs satisfying all the conditions must be ready with a comprehensive set of documents i.e., certificate of incorporation, shareholders and board approvals for the public issue, Memorandum of Association (MoA), Articles of Association (AoA), minutes of meetings,
SMEs that do not meet the listing criteria are not ready for SME IPO thus, cannot go public to raise funds. How to get ready for SME IPO
Appointment of merchant banker
Merchant bankers, is a key intermediary, who assist SME IPO issuer companies from start to end throughout the IPO process.
Merchant bankers are SEBI-registered investment bankers, who are responsible for managing the public issue.
Everything from the capital restructuring to due diligence, filing IPO prospectus, obtaining exchange approval, valuation, and pricing, andmarketing; all is done by IPO lead managers.
They also bring in industry connections and networks to drive demand for the public issue.
Merchant bankers have sound knowledge of regulatory requirements and thus, ensure legal and regulatory compliance in the IPO listing process.
Help SMEs preparing for the IPO to connect with other parties; legal counsel, financial advisors, auditors, underwriters, etc.
Lead managers for IPO assist entrepreneurs in the IPO underwriting services. SEBI regulations require every public issue by an SME to be fully underwritten with 15% from the merchant banker’s account.
SME founders must hire a reputed lead manager who has a good track record of managing successful SME IPOs in the past.
Best SME IPO Merchant Banker (Report Link)
File IPO Draft Prospectus or DRHP
Once you are ready for the IPO and select the exchange desirous to get listed. You must prepare and file an IPO Draft Red Herring Prospectus (DRHP).
What is Draft Prospectus or DRHP? DRHP or Draft prospectus is a first document or can be considered as an IPO registration document. Filing DRHP with the exchange means the SME intends to go public to raise funds from the public.
DRHP is an important IPO document that contains important information about the objective of the IPO issue, the company’s financial performance in recent years, valuation, risks, growth plans, etc.
Merchant bankers help the IPO issuer company to create and submit an IPO draft prospectus to the respective exchange – BSE SME or NSE Emerge. The lead manager makes sure that the company complies with the regulations and that all the information in the DRHP is true with no discrepancies.
Potential investors use DRHP to make an informed investment decision on whether or not to apply for an SME IPO.
Obtaining in-principal approval from SME Exchange
As you file the DRHP, the exchange regulator reviews and validates the details provided in the draft prospectus. Exchange officials conduct site visits and review important records and documents before approval.
The Exchange Listing Advisory Committee also invites company promoters for meetings. Based on the outcome, the Exchange officials either approve in principle or inform the company about the discrepancies.
Based on the exchange review report, the company has to make the required changes in the DRHP and file it again.
Marketing the Public Issue to drive demand
Merchant bankers conduct roadshows and held in-person meetings with institutional investors to showcase their business potential.
They even use their investors’ networks to drive demand for the SME public issue.
Roadshows, management presentations, and advertising – all are done to attract the maximum number of investors to subscribe to the issue.
File Prospectus with Registrar of Companies (RoC)
Once DRHP gets approved, it’s time to file the final prospectus to the RoC.
Red Herring Prospectus (RHP) is a final document that provides issue-specific information including issue opening period with an indicative timeline, issue size, issue price, market makers proportion, and latest audited financial results.
RHP is a comprehensive document that provides detailed and also updated information about the company.
RHP must be filled along with required supporting documents i.e., copies of audited financial results, certified copies of MoA and AoA, Due diligence certificate, in-principal approval, peer review auditors report, etc.
Correct valuation and IPO pricing are important and merchant bankers as they are experts help SMEs in justified business valuation. Based on the investors’ interest in the issue and the SME’s growth potential, they determine valuation and fix the IPO issue price.
SEBI’s norms specified trading lot size for SME IPOs, ranging from 100 shares to 10,000 shares, based on the offer price.
SME IPO Subscription Window Opens
On the IPO opening day, the issue opens for public subscription.
An IPO generally remains open for 3 working days. Retail investors, Non-institutional investors (NIIs), and Qualified Institutional Investors (QIIs) can apply for the public issue, before the IPO closing date.
The minimum retail investment amount in an SME IPO is Rs 1 lakh and the minimum investment in the HNI category is Rs 2 lakh.
Anchor investors can bid for an IPO a day before the issue opening date. Qualified Institutional buyers who invest more than Rs 1 crore in an SME IPO are called Anchor investors.
Allotment of SME IPO Shares
The IPO registrar is responsible for allocating shares to investors.
So after the closure of the issue, the Registrar and Transfer Agent (RTA) processes all IPO applications, rejects invalid bids, and allocates and transfers shares to investors in different categories – retail, non-institutional investors, and qualified institutional bidders.
The registrar also publishes a Basis of Allotment (BoA) specifying how shares are allotted. The BoA states the number of applications received, thenumber of shares allotted, and the allocation ratio in different categories.
SME Gets Listed on Exchange
Finally, the day comes when a privately held SME becomes a publicly traded entity by listing on a dedicated SME exchange – NSE SME or BSE SME. For this, theexchange publishes a listing circular containing the security code, symbol, ISIN, and date of listing.
After listing, the company’s shares are traded in the secondary market on the chosen stock exchange.
Even after an SME gets listed, shares are traded in lots only. It means investors cannot purchase and sell a single share and must trade in lots.
Publicly traded SMEs are subject to regulatory compliance requirements. These companies must file their half-yearly results, annual reports, shareholder structure reports, and corporate governance reports, and inform the exchange of key corporate events. Post-Listing compliance Norm for SMEs (Link)
Are you an SME company looking to raise funds and get listed on the stock market? We can help — contact us today to start your IPO journey with trusted professionals.
Frequently Asked Questions
Initial public offering of shares by a small and medium-sized company to tap into the public market is called SME IPO. Instead of pitching individual and/or institutional investors, SME IPO provides a direct way to entrepreneurs to get required funding for growth.
Do SME IPO offer documents need SEBI approval?+
No, SME IPO offer document including Draft Red Herring Prospectus (DRHP) and Red Herring Prospectus (RHP) does not require SEBI’s approval as the regulatory authority has delegated such power to the stock exchanges. Thus, merchant bankers present IPO offer documents to the exchanges for approval.
How are shares listed on the SME Index?+
The share listing process of an SME company on the BSE and NSE SME Index follows the below process;
Hiring an SME IPO consultant or merchant banker.
Compliance with due diligence and true and fair presentation of financial data.
Submission of draft prospectus and filing it with exchange.
Verification and approval of DRHP by the stock exchange.
Get in-principal approval from the stock exchange.
Filling documents with RoC and intimate exchanges regarding issue opening and closing dates.
IPO launch on the open date for subscription.
Allotment of shares by the registrar.
Listing of SME shares on the respective SME platform at BSE and NSE.
How SME IPO issue price is determined?+
SME IPO issue price is the price at which the shares will be offered for sell to investors. The issuer company appoints a lead manager to fix the IPO issue price based on the investors’ response and demand of the share.
What are the price fixing methods in an IPO?+
There are two broad ways to fix shares price for the IPO issue; book-building and fixed pricing method. In the book-building process, merchant bankers decide the price range whereas, in the fixed price method, shares are issued at a specified price. The process of IPO valuation to fix the issue price includes a thorough analysis of market demand for the IPO, the company’s growth potential, and a comparative analysis with industry peers.
What are the post-listing compliances for SME entities?+
Market regulators have relaxed post-listing compliance requirements for securities listed on the SME platform. The key compliance norms for listed SMEs are as follows;
Submission of financial results on a half-yearly basis.
Submission of shareholding patterns on a half-yearly basis.
No requirement of publishing financial results as the company only needs to display financial statements on its website.
How does SME IPO listing work?+
Getting listed on the SME platforms of NSE and BSE is not as difficult as it seems. An issuer company has to necessarily follow the below steps to become a listed SME entity;
Become an IPO-ready company.
Appoint various intermediaries in consultation with the lead managers such as RTA, depositories, bankers to the issue, etc.
Due diligence compliance i.e. documentation, material contracts, required approvals, financial statement preparation, etc.
Prepare and submit a Draft Red Herring Prospectus (DRHP) in the SEBI-prescribed format.
Getting in-principal from the stock exchange.
File the Red Herring Prospectus (RHP) with the ROC.
Receive approval and intimate stock exchange for issue opening and closing dates.
Open the issue for the subscription.
Allotment of shares as per the finalized basis of allotment
Listing and trading of shares.
What are the intermediaries in an SME IPO issue?+
The process of SME IPO issue to get the shares listed involves many intermediaries including;
Merchant bankers or lead managers
What is the role of registrar in an IPO by SME?+
What is the role of bankers to the issue in an SME IPO?+
In an IPO, it is the duty of bankers to the issue to ensure that all the funds are received and transferred to the Escrow accounts. Lead manager appoint bankers to the issue at all the collection centers who are engaged in banking-related activities such as follows;
Role of bankers to the issue
Acceptance of applications along with the application money
Transfer funds to the company promoters
Process refunds to rejected applicants
Can I sell a single SME IPO share on the listing date?+
No, you cannot sell a single SME IPO share on the listing date. It doesn’t matter whether you are a retail or non-retail investor; you can buy and sell SME IPO shares in the lots only. One can purchase and sell 1 lot or in multiples of it.
For instance, if a SME company issues IPO in the lot size of 2,000 shares. It means you have to buy atleast 1 lot of 2,000 shares. The lot size is the minimum quantity of shares available for trading hence, you cannot purchase any number of shares less than 2,000 shares. All the buy and sell orders are placed for the lots only.
Can I buy SME shares in the Pre-Open market and sell it on same day?+
No, you cannot sell SME IPO shares on the same day when you have purchased it. Pre-open market session starts from 9:00 AM to 9:45 AM during which you can place a buy order to purchase SME shares. If your buy orders gets matched with the IPO listing price, your order will be executed otherwise cancelled.
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