Small and medium-sized business initial public offerings (SME IPOs) in India are ushering in a new era for the country’s financial markets. Despite being the lifeblood of the country’s economy, small and medium-sized enterprises (SMEs) in India have historically needed help gaining access to capital markets and receiving adequate finance.
This is rapidly shifting, however, as small and medium-sized enterprise IPO platforms gain popularity and develop into a significant source of finance for new businesses. The newfound ease of access to capital markets and listed on the stock exchange like the
BSE SME and the NSE Emerge directly result from SEBI’s easing of regulations.
Since its inception in 2012, a whopping INR 5,825 crores have been raised by 474 different companies. Numerous capital-starved SMEs benefit from IPOs by increasing their liquidity, credibility, governance, and transparency without giving up significant portions of their ownership to foreign risk capital and VCs.
SME IPO: What Does It Mean?
Small and medium enterprise initial public offerings refer to a company’s first public offering and the fact that it is a small or medium-sized enterprise. Small and medium-sized enterprises (SMEs) can avoid the hassle of approaching numerous individual and institutional investors for funding by going straight to the public markets.
Regulations for small and medium-sized enterprises (SMEs) are more liberal than those for more giant corporations seeking to go public through an initial public offering (IPO), including but not limited to the following:
1) The SMEs must have a post issue paid up capital of INR 3 crores or more, with the same reflected across tangible assets and overall net worth.
2) The company’s financial records must indicate distributable profits after deducting unusual income for at least two of the three most recent fiscal years.
3) The minimum trading lots for SME IPOs should be between 100 and 10,000 shares, with the exact number fluctuating based on price, volume, and more factors.
4) There must not be any petitions for the company’s winding up pending in any courts in the country.
5) The company’s promoters must have been in place for a minimum of a year before the application for the SME IPO.
SME IPO Requirements
Before a company’s shares may be listed and traded on an exchange, the company must announce an Initial Public Offer (IPO) on a small and medium enterprise (SME) platform. Getting listed and raising capital through an SME-IPO is a common practice. SME IPO backers have seen massive gains.
SME IPO requirements in India can be broken down into the following categories:
● The organization must have Rs 3 crore in paid-up capital. Both the net worth and the tangible assets should be equal.
● A company must have demonstrated distributable profits for at least two of the past three fiscal years (after accounting for extraordinary income). This complies with the requirements of Section 124 of the Companies Act of 2013.
● According to SEBI regulations, the minimum trading lot for small and medium-sized enterprise initial public offerings (IPOs) varies from one hundred to ten thousand shares. These are evaluated frequently and changed as needed to account for any post-listing price changes.
Impact of SME IPO
SEBI is preparing to relax its rules so new businesses can join the SME platform and reveal their financial and profit goals. The motivation for this move was a wish to level the playing field for smaller, less well-funded firms.
The majority of new businesses require funding to expand. When it comes to raising capital, large companies have a lot of opportunities, such as approaching private equity investors, whereas tiny firms have fewer choices. In this instance, the companies and the investors would benefit significantly from access to a platform designed specifically for them.
As the companies on the SME platform grow in stature, they can draw in a larger pool of investors. The rapid growth in the quantity of SME stock options and the higher returns they offer have attracted many investors. The Indian market appears favorable for SME-IPOs with backing from the exchange board and investors. Small and medium-sized enterprises (SMEs) in India are crucial to the economic development of the country and the creation of new jobs.
How to Apply for SME IPOs?
Here is the step-by-step process for applying for SME IPOs:
● There are several online applications that allow users to apply for SME IPOs (i.e., IPOs of small and medium-sized companies) through UPI in the retail category, up to a maximum of 2 Lakhs.
● Here is the complete list of UPI applications for SME IPOs: https://www.npci.org.in/what-we-do/ipo/live-partners
● Please note that under the SME category, you can sell your shares directly through any online application.
● The client must sell a substantial number of shares in the SME.
● Clients are restricted from selling their SME shares anywhere other than the exchange on which such claims are listed.
Note: Remember that investors and traders selling SME shares must do so in lots or multiples of lots. Shares in a small or medium-sized enterprise (SME) can only be sold on the stock exchange where those shares are listed. For instance, one cannot trade shares listed on the National Stock Exchange (NSE) on the Bombay Stock Exchange (BSE) or vice versa.
Advantages of SME IPOs
Having defined SME-IPO, we may examine its advantages. The new wave of social media, mobile technology, and e-commerce companies going public has caused a worldwide frenzy in the IPO market. However, in the Indian market, things are a little different. Even though Snapdeal, Paytm, and Flipkart all have stores in India, they all chose to list their wares abroad.
As a result, SEBI worried that companies might stop considering Indian investors altogether. To accommodate new businesses, the Institutional trading platform was developed. The Institutional Trading Platform allows many different startups to list and trade shares without going through an initial public offering.
When does an SME IPO go public?
SME IPO listings are governed by a separate set of rules that SEBI has approved. The essential requirements for SMEs to complete the listing procedure are outlined below:
- SMBs are subject to the same rules regarding the appointment of a merchant banker. SMBs would benefit from working with an SME IPO consultant during the IPO process.
- The next process entails due diligence and ensuring that our books and records are in order and accurately reflect the company’s financial situation. This verifies that the information that could change the company’s narrative is consistent.
- Similarly to a traditional initial public offering (IPO), small and medium-sized enterprises (SMEs) must submit a red herring draught prospectus. It provides detailed accounts of the company’s current state and future projections. Investors can look to the RHP for direction.
- All information and documents submitted throughout the prospectus filing process are checked and double-checked to ensure accuracy and remove any room for error. This is also the time when the site is checked out.
- The SME receives principal approval but is still required to meet certain conditions. Before launching the public offering, the company must meet all eligibility requirements.
- After complete due diligence and approval are granted, the issue is opened, and investors are invited to submit bids. The public offer will be available for a short period.
- The time it takes to have your shares listed and trading on the bourses is typically around a week. Investors can begin trading the scrips on the secondary market after they have been recorded and allocated.
It takes a long time and a lot of paperwork, from hiring a merchant banker to listing IPO shares. You, the investor, would do well to learn the ins and outs of the initial public offering share listing procedure. A preliminary assessment of market tendencies and investor interest determines the lot size and issue price. Once listed, the stocks trade just like any other share of stock and experience price fluctuations in response to supply and demand.
The Verdict
Startups and the ecosystem as a whole benefit greatly from SME IPOs. While still in its infancy, these platforms’ increasing interest and benefits bode well for their future as a trusted source of capital for startups.
These listings’ market cap and weightage are now negligible, but this will change as India’s startup environment develops. While the advantages to entrepreneurs are clear, SME IPOs benefit investors by giving them access to early-stage prospects previously only available to venture capital firms and banks. Retail investors can reap huge rewards from the seemingly endless expansion opportunities despite the dangers.
FAQs
● Is it wise to put money into an SME IPO?
Small and medium-sized enterprise IPOs are risky in the same way that regular IPOs are. The company’s fundamentals, the market’s state, and your risk tolerance will determine whether or not an IPO from a small or medium-sized enterprise is a good investment for you.
● Is SME IPO safe?
Initial public offerings (IPOs) by smaller companies are frowned upon. These firms face more significant market risks because of their infancy and smaller size. Furthermore, the stock exchange, rather than SEBI, verifies their valuation. SME IPOs are best for those with a strong tolerance for risk.
● When can I sell the SME IPO listed shares?
If you are a retail investor, you can sell your shares in a small or medium-sized enterprise (SME) IPO after it has been listed. Typical lock-in periods apply to other types of investors.
● What are small and medium-sized enterprise stocks?
SME stocks are shares in rapidly expanding small and medium-sized businesses. Each of BSE and NSE’s Small and Medium Enterprise (SME) platforms is designed to help startups and other early-stage ventures raise Rs. 25 crores in funding.
● To what extent do SMEs qualify for listing?
Stocks from SMEs can be traded on the stock market. Small and medium-sized enterprises (SMEs) may list either on the NSE’s Emerge platform or the BSE’s BSE SME platform.
