Introduction: SME IPOs, or initial public offerings tailored for small and medium enterprises, provide a crucial avenue for these businesses to raise capital and expand their operations. Despite facing challenges in securing funds from traditional financial institutions, SMEs can leverage the SME IPO platform established by stock exchanges like NSE Emerge and BSE SME. This article explores the fundamental aspects of SME IPOs, including eligibility criteria, the IPO process, and compliance obligations, shedding light on how SMEs can tap into capital markets for growth and development.
WHAT IS SME IPO?
SME IPO means an initial public offering of small and medium enterprises (SME). Like any other company, SME also needs capital to expand its business but it is arduous for them to raise funds due to inadequate facilities from financial institutions or conduct a regular IPO.
For this, NSE and BSE have established a separate SME IPO platform, NSE Emerge and BSE SME respectively for listing and trading of SME.
SMEs should meet the following basic eligibility requirements as prescribed by the exchanges. The criteria for SME IPO are explained below:
SME IPO ELIGIBILITY:
- The company should be registered in India under the Companies Act 1956/2013.
- The post-issue paid-up capital should not exceed Rs 25 crores.
- The company should have a track record of at least three years.
- The company should have positive net worth in at least two out of three financial years.
- The National Company Law Tribunal (NCLT) or a court should not have filed a winding up petition in respect of the company.
- The issuer should provide a certificate stating that the company has not been referred to the Industrial and Financial Reconstruction Board (BIFR).
- The issuer and the promoting companies have not been subject to any proceedings under the Insolvency and Bankruptcy Code.
- The issuer / promoter / directors / promoter group / selling shareholder should not be excluded from accessing the capital market by the Board.
- The promoters / directors / founders / investors should not be classified as fugitives or delinquents under the Fugitive Business Offenders Act 2018.
- Directors should provide documentation if they are under investigation or criminal proceedings.
- Articles of incorporation should not contain restrictive clauses.
- The company should have an agreement with both Indian depositories CDSL and NSDL.
The above is a basic checklist and certain criteria vary from exchange to exchange.
IPO PROCESS:
The IPO process begins on the day the issuing company decides to go public till the listing of the IPO and the post issue activities. It is governed by SEBI, the market regulator, which protects the interest of investors and regulates the securities market and related matters.
The IPO process incorporates various stages which has been enclosed here,
1. Appointment of Merchant Banker:
-The Company appoints a merchant banker (lead manager). These are entities registered with SEBI to assist companies throughout the IPO process.
-The merchant banker helps the company choose an exchange and engage other intermediaries such as bankers, registrars, market makers and underwriters.
-The issuer company and the merchant banker conduct due diligence and prepare the Draft prospectus (DRHP).
2. SEBI Approval:
– The Draft Red Herring Prospectus (DRHP) is submitted to the Securities and Exchange Board of India (SEBI) for review and approval.
– SEBI conducts a thorough examination of the DRHP to ensure compliance with regulatory frameworks and safeguard investor interests.
– Feedback and clarifications may be requested by SEBI, necessitating revisions to the prospectus before final approval is granted.
3. IPO Application to Exchanges:
-The merchant banker completes the IPO application form and submits it to the stock exchange. Exchange authorities review records, conduct site visits and other investigations.
-After that, the exchange approves the IPO application. This means that the issuing company meets all the requirements.
-In the case of SME IPO, the IPO documents are reviewed by the stock exchange and not by SEBI, as in case of the Mainboard IPO.
4. Price Determination:
-The issuer and merchant banker determine the IPO pricing method: Fixed Price issue or book-building issue.
-In fixed price offering, the price at which shares are sold and allotted in the is announced to investors prior to the IPO.
-In Book Building Issue, the issuer decides a price range or a 20% price range within which investors can bid for the shares. The final price is determined after the biding process is completed.
5. Red Herring Prospectus:
The merchant banker files a red herring prospectus (RHP). The RHP document is an extension of the DRHP prospectus with additional details such as:
- Issue dates (opening, closing, allotment, and quotation).
- Issue price.
- Updated financial information.
- Other required updates.
6. Roadshow Engagement:
– Following SEBI approval, the company, in collaboration with its appointed underwriters, orchestrates a roadshow.
– The roadshow serves as a platform for engaging with institutional investors, analysts, and other stakeholders to elucidate the investment proposition and garner interest in the IPO.
– Insights gleaned from the roadshow may inform final pricing decisions and allocation strategies.
7. IPO Launch:
– The IPO will open and close as scheduled. Once the IPO opens, it can be determined if the IPO is oversubscribed or undersubscribed. This is tracked separately for each investor type (institutional, non-institutional, retail, etc.) and is available in real time on the exchanges’ websites.
8. Allotment Process:
– Shares are allocated across different investor categories, including institutional investors, high-net-worth individuals (HNIs), and retail investors.
– Allocation norms prescribed by SEBI are adhered to, ensuring equitable distribution and fair access to IPO shares for all investor segments.
9. Listing and Trading Commencement:
– Upon finalization of the IPO price and allotment process, the company proceeds to list its shares on designated stock exchanges such as the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE).
– Trading in the newly listed shares commences on the stipulated listing date, marking the commencement of public trading.
10. Market Dynamics Monitoring:
– Post-listing, the company closely monitors market dynamics, including trading volumes, price movements, and investor sentiment.
– Ongoing engagement with market participants and stakeholders facilitates a nuanced understanding of market perceptions and responses to the IPO.
11. Post-IPO Compliance and Governance:
– The company remains committed to upholding stringent post-IPO compliance obligations, encompassing periodic financial reporting, disclosure requirements, and adherence to corporate governance norms.
– Compliance frameworks established by SEBI and other regulatory bodies are diligently observed to instill investor confidence and foster long-term stakeholder trust.
Throughout the IPO journey, a steadfast commitment to transparency, regulatory compliance, and investor communication underscores the company’s dedication to facilitating a seamless transition to public ownership and fostering sustainable value creation for all stakeholders.
ADVANTAGES OF SME IPOs:
- Capital Access: SME IPOs offer small and medium-sized enterprises a strategic avenue to access capital from a broader investor base. This infusion of funds can be utilized to fuel expansion initiatives, address working capital requirements, retire debt, or pursue innovation and R&D endeavors.
- Enhanced Market Presence: Going public through an IPO elevates the market visibility and credibility of SMEs, positioning them as established players in their respective industries. The listing on a stock exchange enhances the company’s profile, attracting attention from investors, customers, suppliers, and potential business partners.
- Investor Liquidity: SME IPOs provide an avenue for existing shareholders, including founders, early investors, and employees, to realize liquidity by selling their shares in the public market. This liquidity event not only rewards early contributors but also incentivizes talent retention and attracts top-tier professionals to the company.
- Lowers the debt burden: Raising funds through an IPO helps reduce company’s debt by refinancing or paying the company’s debt.
- Regulatory Compliance and Governance Standards: Listing on stock exchanges necessitates adherence to stringent regulatory compliance and corporate governance standards. By embracing these standards, SMEs demonstrate their commitment to transparency, accountability, and responsible stewardship, thereby fostering investor trust and confidence.
QUARTERLY COMPLIANCES FOR SME IPO:
| S. No. | Regulation | Period Cover | Time limit of filling |
| 1. | Regulation 13 (3):
Pending, received, disposed, and unresolved Investor queries/complaints need to be completed |
April to June
July to Sep Oct to Dec Jan to March |
Every quarter, within 21 days of the end of the quarter. |
| 2. | Reconciliation of share capital audit report includes the reconciliation of the following:
Total issued capital & listed capital. Capital held by depositories in DEMAT. Changes in share capital (quarterly) details. In principle approval obtained by the issuer from all stock exchanges. This report needs to be submitted on a timely basis to the board, SEBI and the exchange. |
April to June
July to Sep Oct to Dec Jan to March |
Within 30 days from the end of every quarter. |
HALF YEARLY COMPLIANCES FOR SME IPO:
| S. No. | Regulation | Period Cover | Time limit of filling |
| 1. | As per Regulation 31 (1)(b) Shareholding Pattern (Details of promoters holding in the company), needs to be updated to RoC, SEBI and intimation sent to the exchanges. | April to Sept
Oct to March |
Within 21 days from the end of the relevant half year. |
| 2. | Regulation 32(8) requires companies to declare the Statement of deviation or variation in the utilization of proceeds/object of issue. | April to Sept
Oct to March |
Within 45 days from the end of the relevant half year. |
| 3. | Regulation 33(5) requires companies to file Financial Results in a timely manner. Additionally, a press release needs to be issued to exchanges and to SEBI apart from RoC. | April to Sept
Oct to March |
Within 45 days from the end of the relevant half year. |
ANNUAL COMPLIANCES FOR SME IPO
| S. No. | Regulation | Period Cover | Time limit of filling |
| 1. | Regulation 34(1) requires complete (Financial Statements) to be submitted. | Once in a year | Not later than the day of commencement of dispatch to its shareholders |
| 2. | Regulation 40 (10) (Listing Obligations and Disclosures) requires all obligations (outstanding and fulfilled) to be mentioned. It also requires companies to spell out the disclosures and their impact. | Once in a year | Within 30 days from the end of the financial year |
EVENT BASED COMPLIANCE FOR SME IPO
| S. No. | Regulation | Period Cover | Time limit of filling |
| 1. | Regulation 7 (5) – Intimation of appointment of Share Transfer Agent should be done to RoC, SEBI, exchanges and investors. | Event-based | Within 7 days of Agreement with RTA. |
| 2. | Regulation 28 (1) – In-Principle approval for the financial instrument to be launched. | Event-based | Prior to Issuance of Security. |
| 3. | Regulation 29 (1) (a) – Prior Intimations of Board Meeting for Financial Result needs to be given to authorities and investors. | Event-based | At least 5 clear days in advance (excluding the date of the intimation and date of the meeting). |
| 4. | Regulation 29(3) – Prior Intimations of Board Meeting for alteration in nature of securities needs to be given to authorities and investors. | Event-based | At least 11 clear working days in Advance |
| 5. | Regulation 30(6) – Disclosure of events specified in Part A of Schedule III (Material events) needs to be given to authorities and investors. | Event-based | Not later than 24 hours from the occurrence of an event. |
| 6. | Regulation 42(2) – Record date or Date of closure of transfer books needs to be given to authorities and investors. | Event-based | At least 7 clear working days in advance (excluding the date of intimation and the record date). |
| 7. | Regulation 44(3) – Voting results by shareholders need to be given to authorities and investors. | Event-based | Within 2 working days of the conclusion of Meeting |
| 8. | Regulation 45(3) – Change in the name of the listed entity needs to be given to authorities and investors. | Event-based | Prior approval (before filing a request for a name change with ROC) |
FAQS
Q.1 If we are a proprietorship firm/partnership firm/LLP then can we go for SME IPO?
Ans. Yes, if there is a track record of last 3 years then upon conversion of firm into a company, the entity can go for a SME IPO. Rest all the conditions will be same.
Q.2 What is the valuation that we will get?
Ans. Valuation are generally computed on the basis of PE ratio which is a multiplier on net profit. Example: If industry PE is 10X and profit after tax is Rs.5 crores then valuation will be
Rs.5 crores x 10 = Rs.50 crores
PE depends on various factors like Industry PE, company profitability, future projects etc.
However, valuation methods vary from company to company.
Q.3 What is the minimum dilution of Equity?
Ans. Minimum 25% equity needs to be diluted. This way the paid-up capital for pre IPO should not exceed Rs.18.75 crores.
Conclusion: SME IPOs represent a critical avenue for small and medium enterprises to access capital markets, fuel their growth ambitions and build enormous wealth. After going public, it’s important for the company to keep an eye on how its stock is doing and focus on being transparent and creating value for its shareholders. As the IPO landscape changes, companies need to stay flexible and take advantage of new opportunities while being aware of potential risks.
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The author can be reached at +91-9407557572 & kartik@ackassociates.com.
(Republished with amendments)
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