Small and Medium Enterprise IPO (SME IPO)

An SME IPO, as the name suggests, is an Initial Public Offering for small and medium-sized businesses. These businesses, which otherwise may not have access to sufficient funds, can tap into the public markets directly and gain substantial liquidity. SME IPOs are similar to regular IPOs, where companies offer their previously held private stocks to the public. However, SME IPOs have certain characteristics that differentiate them from regular IPOs. For instance, the minimum investment in a regular IPO is Rs.12,000 to Rs.15,000, while for SME IPOs, it is Rs.1,20,000 to Rs.1,50,000. Additionally, only long-term and capital-intensive players are permitted to take part in SME IPOs. SME IPOs offer several advantages to businesses, such as access to capital, improved visibility, better branding, and a wider customer base.

 Small and Medium Enterprises (SMEs) play a crucial role in the economy of any country, including India. They contribute significantly to employment generation and overall economic growth. However, SMEs often face challenges, such as limited access to capital and finance, which can hinder their growth and sustainability.

Access to adequate capital is particularly important for SMEs as it enables them to invest in technology, infrastructure, and human resources, which in turn can improve their productivity and competitiveness in the market. A lack of financial resources can make it difficult for SMEs to expand their operations, invest in research and development, or even sustain day-to-day business activities.

In recent years, the Indian government has recognized the importance of supporting SMEs and has taken several initiatives to address the challenges they face. These initiatives include the establishment of specialized financial institutions, providing financial incentives and tax benefits, and promoting digital platforms to facilitate access to finance and support services for SMEs.

By addressing the access to capital issue and providing favorable conditions for SMEs to thrive, the government aims to enhance their productivity, create more employment opportunities, and foster overall economic development.

Features of SME IPOs

 Yes, that is correct! In India, a company needs to announce an Initial Public Offering (IPO) on an SME platform within an exchange before its stocks can be listed and traded. SME IPOs provide a popular way for companies to raise funds from various investors and get listed on the stock exchange.

Some of the main criteria that a company needs to meet for an SME IPO in India include:

• Paid-up Capital: The company must have a minimum paid-up capital of Rs 3 crore, which should be equal to the net worth and tangible assets as well.

• Distributable Profits: The company should be able to demonstrate that it has distributable profits for at least two of the preceding three financial years (excluding any extraordinary income). Criteria like these are in accordance with the Companies Act 2013, Section 124.

• Minimum Trading Lot: SEBI guidelines dictate that the minimum trading lot for SME IPOs ranges from 100 to 10,000 shares, depending on the price bracket of the IPO. These minimum trading lot sizes are regularly reviewed and revised based on the price movement of the shares after listing.

Investing in SME IPOs can provide attractive returns to investors if the company performs well after listing. However, it is important for investors to carefully assess the investment opportunity and conduct thorough research and analysis before making any investment decisions.

Difference between SME IPO and Mainboard IPO

There are two main types of IPOs - Mainboard IPOs and SME IPOs. The main differences between these two types of IPOs are listed below:

Eligibility criteria: Companies filing for a Mainboard IPO need to meet stringent eligibility criteria, including a higher minimum paid-up capital requirement, higher profitability standards, and a longer track record of financial performance. SME IPOs, on the other hand, have relaxed eligibility norms and are specifically designed for small and medium-sized enterprises.

Listing platform: Mainboard IPOs are listed on the main board of the stock exchange, while SME IPOs are listed on the SME platform of BSE or Emerge platform of NSE.

Size of the issue: Mainboard IPOs are usually much larger in size compared to SME IPOs. Mainboard IPOs can raise funds of several thousand crores, while SME IPOs typically raise funds in the range of a few million to a few tens of millions.

Disclosure requirements: Mainboard IPOs are subject to more stringent disclosure requirements as compared to SME IPOs.

Investors need to consider a range of factors when investing in either type of IPO, including the track record of the company, the pricing of the share, the quality of management, the market environment, among other things.

SME IPO – Eligibility criteria

In order to be eligible for an SME IPO and get listed on the exchange in India, SMEs need to meet the following eligibility criteria:

• The SME should be incorporated under the Companies Act, of 1956 (now replaced by the Companies Act, 2013).

• The face value (post-issue paid-up capital) of the SME should be up to ?25 Crore.

• The SME's net tangible assets should be worth ?1.5 Crore.

• The SME must have a track record of a minimum of three years if it was formed by converting partnership/proprietorship/LLP firms.

• The SME should have a website.

• The company's promoters should not change for at least a year after filing the IPO.

• The SME should agree to trade in demat securities.

• The SME should enter into a contract with the depositories.

By meeting these criteria, SMEs can raise funds from public investors through an IPO and get their shares listed on the SME platform of the BSE or Emerge platform of the NSE.

However, it is important for potential investors to carefully research and analyze the company before making any investment decisions. Factors such as the company's business model, financial position, management team, competitive landscape, and other regulatory considerations should be considered before investing.