Small and Medium-sized enterprises (SMEs) can raise funds from the public by offering IPO. It is the first time public offering of shares by an SME to obtain the required amount of capital. Continue reading to know more about what is SME IPO, the process of listing SME IPO, exchanges where SMEs are listed, how does it works, key eligibility criteria, why should SMEs go public, and pros and cons uncovered.
What are SMEs Small and Medium-sized organizations?
Key Facts on SME IPO in India
SME IPO Exchanges: Where are SMEs listed?
Who can issue SME IPO: Key Eligibility Criteria to Know
How SME IPO Works: A BluePrint
Difference between SME IPO and Mainline IPO
SME IPO Pros – Key Benefits You Must Know
What are SMEs Small and Medium-sized Organizations?
SME is the acronym for Small and Medium-size enterprises. Companies having annual turnover/revenues and assets below a certain threshold are known as SMEs. The Ministry of Micro, Small and Medium Enterprises specified the following criteria for the classification of SMEs in India w.e.f 1st July 2020.
Additionally, small businesses employs 10 – 49 employees and medium-sized businesses may have 50 – 249 employees.
MSMEs (Micro, Small & medium Enterprises) have been a key contributor to India’s economic growth. There are nearly 6.3 crore MSMEs operating in India and contribute significantly to employment, economic development, and innovation. Let’s check out some key facts;
SMEs provide significant employment opportunities in India. The segment employs nearly 40% of the nation’s total workforce.
The MSME segment accounts for 45% of the industrial production or manufacturing output, and 40% of exports.
Indian SMEs segment contributes around 8% to the India’s GDP.
SMEs in India are mainly focused on manufacturing, trade, and service sector.
Rising number of MSMEs in the country boosts innovation and entrepreneurship.
SME IPO Full Form is Small and Medium-sized enterprises Initial Public Offering. SME IPO means IPO for small and medium-sized businesses.
SME IPO is a way of selling shares to the public to raise the required capital for the business. SME IPO is the first-time public offering of shares in the primary market by an SME. In IPO, the company’s shares are get listed on the dedicated SME exchange, and after listing, shares are traded (buy and sell) in the secondary market on the stock exchange.
SMEs can make fresh issue of shares (Fresh Issue) and offer for sale (OFS) to raise the required capital.
Fresh Issue: When a company offers new shares to the public, it is called a Fresh Issue.
Offer for Sale: When company promoters or investors decide to offload their stake and offer their shares for the public subscription it is called Offer for Sale (OFS).
Based on the issue pricing, a company may offer fixed price IPO issue and book-building IPO. When the company offers IPO at a fixed price, it is called a fixed price IPO. But when the price range is specified, it is called a book-building IPO. And, the final price for allotment is decided through the book-building process.
By Sep 2024, 1100+ SMEs have been listed so far together on the NSE Emerge and BSE SME exchange.
Rs 20,000 crore+ of total funds has been raised by SMEs through IPO.
328 SMEs have been migrated to the mainboard exchange of BSE (188) and NSE (140), as per data reported on October 4, 2024.
Year 2023-2024 has been record-breaking for SME IPO; 197 SMEs have raised a total of Rs 6,123.55 crore, the highest-ever both in terms of a number of SME IPOs and total capital raised.
In the current financial year, from April to Sep 2024, Rs 5,500+ Crores of capital have been raised by 150+ SME IPOs.
Current and Upcoming SME IPOs
Relaxed Regulatory Standards: The regulatory requirements for SME IPO is way more relaxed compared to mainline IPOs and thus, encourage SMEs to go public. SMEs with post-issue capital not exceeding Rs 25 crore, having 3 years of operational track record, positive operating profit from the business, and positive net worth are eligible to go for SME IPO. Also, disclosure and compliance standards are less stringent compared to mainboard IPOs.
Companies with post-issue paid-up capital not exceeding Rs 25 crore can list on SME exchange.
Lower cost of listing: Listing on the SME platform has much lower cost than listing directly on the main board, which makes it easily accessible for smaller companies.
Lot size or Minimum Investment: According to the SEBI guidelines, SME IPO lot size may vary from 100 to 10,000 shares based upon the price. The lot size is fixed in such a manner so that the minimum investment (price*lot size) should not be less than Rs 1 lakh.
Underwriting and Market Making: SME IPO must be fully (100%) underwritten, ensuring full subscription of the issue. Also, 3-years of compulsory market-making is required after listing on the SME exchange. What market makers do is they provide two-way buy and sell quotes to maintain liquidity in SME shares.
Migration to Mainboard Exchange: Publicly traded SMEs have the opportunity to shift to the BSE and NSE mainboard exchange. SMEs having traded on the SME exchange for a minimum of 3 years can be migrated to the respective mainline exchange (BSE SME to BSE or NSE Emerge to NSE), subject to the exchange migration criteria. Once migrated, SME will become a mainstream company and subject to tighter regulatory and disclosure norms.
Risk: IPOs by smaller companies tend to be highly risky because such businesses operate at a smaller scale and also have limited track records.
Evidencing the crucial significance of SMEs in economic growth, in 2012, India’s prominent stock exchanges; BSE and NSE have introduced dedicated platforms for listing SME shares.
BSE SME: Launched in March 2012 by BSE (Bombay Stock Exchange). It is the first stock exchange for listing SMEs shares. To date, more than 500 SMEs have been listed on the BSE SME platform and raised above Rs 7,000 crore.
NSE Emerge: NSE Emerge platform was launched by NSE in Sep 2012 as an opportunity to allow SMEs to access required capital for business growth and expansion. SMEs that want to list on the NSE exchange, will be listed on the NSE Emerge (NSE SME). Emerge is a credible platform that brings together emerging businesses and investors to allow SMEs to raise required capital and at the same time, provides an opportunity to investors to invest in growing SMEs or technology startups.
Learn more on SME IPO Listing Platforms
SME IPO works similarly to the regular IPOs with the only difference is that SME IPOs are particularly tailored for small and medium-sized businesses. Let’s quickly point out the process of How does SME IPO listing works:
Pre-IPO Assessment: Not all the SMEs are ready for IPO. Pre-IPO assessment is important to check whether an SME is eligible for the IPO offer or not by meeting the SME exchange listing criteria. SMEs that are not eligible for IPO, please refer How to Get Ready for SME IPO checklist.
Appointment of Merchant Banker: Hire an experienced and credible merchant banker with an impressive track record of SME issue management and listing success.
Due Diligence Assessment: Merchant banker collects all the data, relevant facts, and essential documents and assesses its validity.
Filing SME IPO DRHP: Filling draft offer document with exchange and obtaining regulatory in-principal approval.
Marketing the offer: Conduct roadshows to advertise the SME IPO offer to create the demand for the issue.
Filing Prospectus: Filling final prospectus and announcing the IPO launch date.
IPO Opens: The SME public issue opens for subscription by investors. Both retail and non-retail or institutional investors can apply.
Allotment of Shares: Once the issue gets over, allotment will done as per basis of allotment (BoA) prepared by registrar.
SME Listing: On the IPO listing date, the company’s shares gets listed on the dedicated SME stock exchange.
Even after SME gets listed, shares are traded in the IPO lot size. Trading in SME shares is done in lot size, investors cannot buy and sell one share.
The entire process of listing on the SME exchange may take 3-4 months.
Refer detailed process of how to list your SME IPO, here
Though fundraising is the main objective but why or how the company will use the capital raised is clearly mentioned in the IPO offer document. An SME can raise funds for any of the following reasons:
To meet working capital requirement.
General corporate purposes.
Capital expenditures required for business expansion.
Investment in subsidiary companies to meet their funding needs.
Meet issue relevant expenditures.
To make repayment or prepayment of company and/or subsidiary’s debt either partially or fully.
To invest in new plant and machinery.
Pursue inorganic growth initiatives, such as merger, strategic partnership or acquisitions, joint ventures, etc.
For setting up a new manufacturing facility.
To achieve the listing benefits on the stock exchange, like increased brand visibility.
SME IPO Vs Mainline IPO: Let's explore some key differences between SME IPO and regular IPOs
Know more differences, here
Why Should SMEs go for IPO? Is a key question. The decision to go public has several benefits for both the issuing companies as well as investors.
Benefits of SME IPO for issuing companies
Access to capital: Raising funds is the most important benefits among all. SMEs by selling shares to the public can raise required capital and that too is interest-free. These funds can be used to support company’s growth initiatives, expand business operations, meet working capital requirement, or pay off existing debts.
Brand Visibility: As SMEs operate on a smaller scale so they are less known by the public but when they decides to go for IPO to list on SME exchange, it will be draw media attention, and analyst coverage. So, more people will be aware of the company’s operations. So, listing boosts brand visibility or credibility to a great extent.
Increases investor's participation: Likewise mainline IPO, SME IPOs also have shares reserved for institutional investors and retail investors. IPOs by growth-promising SMEs gets subscribed by anchor investors, qualified institutional investors/bidders (QIIs/QIBs), high-net worth individuals (HNIs), and retail investors.
Know more SME IPO benefits
Benefits of SME IPO for investors
Early investment opportunity: The IPO offers an interesting investment opportunity to investors to invest early in the company. Retail investors can also apply for SME IPOs or buy SME shares from the exchange, where the company is listed.
Potential to offer high returns: Multiple factors, including SME’'s financial performance track record, future growth plans, expansion strategies, management competency, etc. affects company’s performance. A company having sound financial performance with a growing customer base, revenues, profitability, and impressive growth road ahead has the potential to offer substantially higher returns. So as the company grows or expands, investors can get exponential returns on the capital invested.
Exit opportunity for promoters and/or early investors: SMEs at their startup or early-growth stage may be funded by angel investors, venture capital, or private equity investors. SME IPO provides them an exit route because company promoters and/or investors can sell their holdings or divest a portion of their stake and realize their investment value.
Diversification: Investment in SME IPOs allows investors to diversify their portfolio by investing in high-growth companies that are operating in niche segments.
High Cost: SME IPO issue involves various costs associated, like merchant banker fees, underwriters commission, legal consultant fees, listing fees, and more.
Liquidity risk: SME shares are not much traded like large companies, so companies may face liquidity issues and it may be difficult for investors to buy and/or sell shares.
Impact of External factors: Market volatility and investors' sentiments, industry environment may affect company valuation, pricing, and listing success.
Regulatory compliance: Publicly traded SMEs have to comply with applicable exchange regulatory and disclosure norms such as filing half-yearly financial results and more.
Disclosure of sensitive data: Listed SMEs have to submit their financial reports, make necessary disclosures, shareholder report, etc. All the information will be available to the public.
Many emerging SMEs struggle to secure funding for expansion. Though matured businesses have multiple avenues such as private equity investors or institutional investors but smaller companies have very few alternatives.
A dedicated platform tailored for small and medium businesses allows them to get the required capital from the public. Further, growing investors’ interest in SME IPOs provides access to a wider investor base, a higher extent of IPO subscription, and may affect stock performance.
SME IPOs provide a vital platform for smaller companies to access capital needed to grow and expand their businesses. Not only access to equity capital but also brand visibility, a wider spectrum of investor base (institutional and non-institutional investors), and increased reputation and credibility due to regulatory supervision are the key reasons that encourage SMEs to go public.
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.
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