What Is an SME IPO? How Does It Work?

7 min read • Published 22 January 2023
Written by Jatin Pareek

As we know, Initial Public Offering (IPO) is the process where a company plans to go public for the first time. While most people have heard of big companies like LIC, Coal India, Paytm and Zomato, etc., launching their IPOs, smaller companies can also do the same to increase their capital flow.

On that note, SME IPOs are a growing term among investors inclined to invest in IPOs. So, let’s discuss what SME IPO is and how it differs from mainstream or regular IPOs.

This blog will take you through the explanation of SMEs, SME IPOs, their workings, benefits,  and differences from regular IPOs.

What Is an SME? 

Small and Medium Enterprises (SMEs) are certain firms or businesses whose workforce, turnovers, and investments fall below a certain threshold. 

To be specific, companies with a turnover limit of ₹5 crore to ₹50 crores are considered small enterprises. On the other hand, firms having a turnover of ₹250 crore and less are classified as medium enterprises. 

SMEs are crucial contributors to the Indian economy. They also offer job opportunities to a large section of the population and contribute massively to the country’s industrial output and exports.

Several factors contribute to the growth of these SMEs. Some of these factors are as follows. 

  • Advancement of technology
  • Funding and investments by local and foreign investors
  • Reduction of barriers to trade
  • Government support and ease of doing business

What Are SME IPOs? 

As the name suggests, when a small or medium-sized company announces an Initial Public Offering (IPO) to raise capital, it is known as SME IPO. 

They are fairly similar to regular IPOs in concept and process but are smaller in size. As a result, these IPOs are not listed in stock exchanges like the Bombay Stock Exchange and National Stock Exchange. They also have different listing requirements. 

In 2012, BSE and NSE opened the Bombay Stock Exchange SME and NSE EMERGE, respectively, to allow the listing of SME IPOs.

These SME IPO platforms are a milestone initiative by SEBI for start-ups and small brands to increase their capital. Once a company becomes popular in the market and rises to an influential position, it can grow its capital by selling its IPO shares. Furthermore, some investors consider SME IPO stocks a fruitful investment as they can deliver high returns with a low initial investment.

How Does an SME IPO Work? 

Firms can use the funds they raise from SME IPOs for acquisition, research and development, and business expansion. They function like traditional IPOs, where SMEs offer their shares to investors for the first time. 

The points below list the working of SME IPO.

Step 1: Appointing Underwriters

An SME firm starts by appointing an investment/merchant banker who plays the role of an underwriter. The underwriter studies and plans the company’s IPO issuance like the normal IPO process.

Step 2: Compliance and Due Diligence

After appointing underwriters, companies provide their records and data for fact-checking and valuation. This throws light on the company’s standing in the market and financial records, thus producing a proper and fair value.

Step 3: Filing Prospectus

Filing the Draft Red Herring Prospectus (DRHP) is also essential for SME firms. This is a proposal with  the details about the company, promoters, sector, products, services, clients, projects, financials, issue detail, overview ect

Unlike regular IPOs, only stock exchanges will review this DRHP. After getting authorisation from stock exchanges, these will become Red Herring Prospectus (RHP).  By studying this Red Herring Prospectus, investors can learn about the SME firm before investing.

Step 4: Opening of the Public Issue

After circulating their RHPs, SMEs prepare to launch their IPOs. Willing investors can apply for shares from the IPO until the closing date. It is also worth noting that the investor cannot purchase shares below the offer price set by firms and their underwriters. 

Like regular IPOs, investors need to purchase these shares in lots. However, the lot size of SME IPOs is typically larger than that of regular IPOs.

Step 5: Allotment of shares

The sale of IPO shares closes on the allotment date. The allotment is the final step that companies follow while issuing IPOs. After the allotment process is complete, shares are traded in the secondary market.

Eligibility Criteria for SME IPOs

Here are some crucial eligibility requirements SMEs must fulfil to issue SME IPO.

  • The company must be registered under the Companies Act, Securities Contracts (Regulations) Act, and Securities and Exchange Board of India Act.
  • The firms must present evidence of positive operating profit for two out of three previous financial years with positive net worth. 
  • Its paid-up capital after the IPO should not be more than ₹25 crore.
  • An applicant for an SME IPO must never have proceedings against it admitted under the Insolvency and Bankruptcy Code or in the NCLT court.
  • No regulatory authority or stock exchange has taken action against the company for three years previous to the filing for IPO.
  • The Issuer should be a company incorporated under the Companies Act 1956 / 2013 in India.

Benefits of SME IPOs 

Here are some ways a company can benefit by issuing an SME IPO:

  • It can help a company improve its corporate governance while allowing it to tap into a pool of investors.
  • SME IPOs help small and medium firms grow their capital and ensure better risk management.
  • Issuing IPOs ensures more liquidity for the present shareholders. As a result, SME IPO helps businesses hold on to their present investors and attract new investors. 
  • SME IPO allows small-scale firms to enhance their visibility and credibility in the market. This helps grow their brand image.
  • It encourages opportunities for growth like business expansion and mergers & acquisitions.

What are the Differences between SME IPO and Regular IPO? 

Following are the points of differences between SME IPO and Regular IPO.

The minimum post-issue capital should not exceed ₹25 crore.The minimum post-issue paid-up capital is ₹10 crore.
Must be 100% underwritten by the merchant banker.IPO underwriting is non-mandatory here under a 50% subscription to QIBs.
The minimum IPO allottees must be 50.The minimum IPO allottees here must be 1,000.
The minimum application size is ₹1,00,000.The minimum application size is ₹10,000 to ₹15,000.
Stock exchanges verify documents and finalise the prospectus here.The SEBI finalises the prospectus, verifies documents, and permits IPO issuance.

Final Words

SME IPOs follow the same objectives as regular IPOs. Therefore, it is important for investors planning to invest in SME IPOs to properly study and analyse the firm’s prospectus. By doing so, they can analyse the firm’s business goals and see how much they align with their investment goals.

Frequently Asked Questions

When should companies conduct financial reporting after SME IPOs?

Companies must conduct and submit financial reports on a half-yearly basis after SME IPOs.

Who should invest in an SME IPO?

SME-IPOs are high-risk investments although they may offer substantial returns. Companies that issue SME IPOs are in the initial stage of their business. This brings in a looming risk that the company might not survive in the future. 
Therefore, novice investors with a low-risk appetite can choose to avoid investing in SME IPOs. If you are ready to bear a huge loss and looking for substantial gains, you can opt for SME IPOs.

What problems do SMEs face on their path to growth?

SMEs face issues like lack of capital and innovation, poor marketing tactics, improper use of technology, and poor infrastructure resulting in low production. These act as hindrances in their path to growth.

What do I need to apply for an SME IPO?

The process to apply for an SME IPO is the same as a regular IPO. To apply for a company’s SME IPO, you must have Demat and trading accounts with a reputed and registered stockbroker. You also need to link these accounts to enable transactions and trading of shares.

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Jatin Pareek

Investment Associate
Jatin is an Investment Professional in the making with expanding expertise in the debt and equity markets. He has completed his Bachelor of Technology in Civil Engineering from the Manipal Institute of Technology. He has helped build Wint Wealth in various capacities ranging from being a member of the Investor Relations Team to contributing actively at the Founder's Office. He has been an integral part of the Assets Team for about a year now.

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