What Is SME IPO? – Kuvera

In recent years, India has witnessed a great deal of retail interest in IPOs, with many well-known companies successfully going public and others preparing for an IPO. As a result, investors have exhibited a great deal of interest in these IPOs, and several of them have been oversubscribed.

Recent companies that have completed a mainstream IPO are large corporations with substantial market capitalization and substantial financial backing. However, does this imply that only large corporations can afford to go public to obtain capital? An SME IPO is the alternative in this situation. An SME IPO is a chance for small and medium-sized businesses to go public. 

Small and medium enterprise initial public offering (SME IPO) is delivering a paradigm shift to the Indian capital markets. It is commonly recognized that small and medium-sized enterprises (SMEs) form the backbone of India’s economy, yet they have often been treated unfairly in terms of funding and access to financial markets.

This is rapidly changing as SME IPO platforms gain traction and become a viable source of finance for entrepreneurs. With the loosening of regulations by SEBI, small and medium-sized enterprises (SMEs) without a significant history of profitability or net worth can now access capital markets and trade on specialized platforms such as the BSE SME and the NSE Emerge.

Since the first launch of this concept in 2012, a phenomenal INR 5,825 crores has been raised by 474 companies. Numerous cash-starved SMEs are acquiring improved liquidity, credibility, governance, and transparency without surrendering huge portions of their ownership to foreign risk capital and VCs.

What Is SME IPO?

The acronym SME IPO refers to the initial public offering of small and medium-sized enterprises. Rather than soliciting capital from private and institutional investors, SMEs can directly access the public markets and earn large liquidity through an initial public offering (IPO).

The initial public offering of small and medium-sized businesses is transforming the Indian capital markets. Small and medium-sized businesses (SMEs) are the economic backbone of India. However, they are subjected to discriminatory funding and market access conditions.

SME IPO platforms are gaining momentum and becoming an increasingly attractive source of capital for firms. With the relaxation of SEBI requirements, small and medium-sized enterprises can raise capital without a lengthy history of profitability or net worth. Now, SMEs have access to financial markets and can trade on platforms like NSE Emerge and BSE SME.

As a result, many SME’s suffering a cash shortage are enhancing their liquidity, credibility, governance, and transparency without ceding a substantial amount of their ownership to VCs and foreign investors.

What is an IPO?

Initial Public Offering (IPO) is a method for a company to raise capital on stock exchange for the first time by selling equity shares. As every business requires capital for expansion, there are two choices available: bank loans or public fundraising. For the latter, a company utilizes an initial public offering (IPO), in which its management sells a portion of its ownership to possible investors, so making them part-owners of the company.

However, in order to qualify for an IPO, the company must register with the Securities and Exchange Board of India (SEBI) and appoint underwriters to assist with the sale of shares. After SEBI gives its approval, the IPO is made available to Individual investors. In addition, following the completion of the IPO, the company’s shares are listed on the National Stock Exchange and the Bombay Stock Exchange, and it becomes a publicly traded corporation.

Within the IPO process, there is a distinct method for small companies to raise capital called SME IPO.

SME IPO Listing – How It Works?

Compliance requirements for SME IPOs are far less onerous than for regular offerings. Nonetheless, businesses must submit all required documentation. The method for SME IPO listing is as follows:

• Appointment of Merchant Banker: In order to underwrite their issue, SMEs must hire a merchant banker.

• Due Diligence: All the company’s data and accounts are examined to verify there are no irregularities.

• Red Herring Draft Prospectus: Similar to a typical IPO, the SME must also file a prospectus outlining the operations and future prospects of the company. This prospectus should serve as a mission statement for potential investors.

• Verification: Upon verification of all papers, the SME receives feedback on any required modifications. Additionally, a site inspection is conducted to verify the company’s claims.

• In-Principle Approval: The SME will receive an in-principle approval, subject to a few criteria, once all facts and data have been validated and before the issue opens.

• Issue Open & Close: The issue is released on a specific date after receiving all clearances. After marketing and promotion, the offering will be open for a few days before shutting and distributing shares.

• Listing & Trading: Investors will be able to buy and sell company shares on the BSE SME or NSE Emerge platforms following full subscription and share allocation.

• The lot size is determined in part by the share price and volume. Constant modifications are made to the shares to facilitate trading and transfer. When the share price and trading volume increase, the company will be able to trade on major exchanges and become a publicly traded corporation.

SME IPO Exchange: Where are they listed?

In 2012, the NSE and BSE launched two exchanges for the listing of SME initial public offerings. These include:

• BSE SME Platform of the Bombay Stock Exchange
• NSE EMERGE is a product of the National Stock Exchange.

Upcoming SME IPO list

What is the Process of SME IPO?

The SME IPO is a method for small and medium-sized companies to go public and obtain capital. The procedure is comparable to a standard IPO, with a few small exceptions. The procedure commences with the selection of a merchant banker. A banker, also known as an underwriter, will do a comprehensive analysis of the company’s financials to assist the company in obtaining accurate data. This covers the amount of money the company intends to raise and the selling price of its shares in an initial public offering.

• The company would then commence pre-IPO preparations. Typically, this begins with capital structure. A banker would assist the company in determining its capital structure. When a company goes public, it is required by law to provide a great deal of information, as it must be transparent. Capital structure assists businesses in preparing this information.

• Once a capital structure has been established, the company will begin hiring bankers, registrars, market makers, etc. As the success of the individuals linked with the IPO can make or break the IPO, companies will take enormous precautions to ensure they engage the proper individuals.

• The company will next begin drafting the DRHP, or draft red herring prospectus. This paper covers all the facts known at the time regarding the company and the IPO. The paper is intended to assist investors in deciding whether to invest in the company’s IPO. DHRP will include information such as the company’s prior financial performance and its predictions for the upcoming quarter. It will also describe how the company plans to operate following the IPO. The information allows investors to determine whether investing in the company corresponds with their investment objectives and risk tolerance.

• As soon as the DRHP is complete, the company will submit it to the stock exchange. In the case of a standard IPO, the Securities and Exchanges Board of India (SEBI) will assess the DHRP. The same is done by stock exchanges for IPOs by small and medium-sized enterprises, though.

• Once the stock market approves the company’s DRHP, it will be made available to the public, and while retail investors assess their options, the corporation will begin the process of pricing its stock. At this point, the corporation will have information from the bankers and underwriters, and they will formulate a pricing that they believe would work.

• Next, the corporation opens the public offering. Similar to a traditional IPO, investors will have the ability to apply for shares at this stage. In a SME IPO, stocks will also be sold to investors in lots, but the maximum size will be larger than in a mainstream IPO.

• The third step will involve allocating the shares to the applicants. In addition, they will begin trading on the stock market, unlike the mainline corporations.

Listing Requirements for BSE SME IPO

As stated previously, small and medium-sized businesses trade on a distinct stock exchange. The SME platform of the Bombay Stock Exchange is known as BSE SME. The listing requirements for the exchange are listed below.

• Before issuing, the corporation must be a limited liability company with a face value of Rs.1 crore. Additionally, the face value must be less than Rs. 25 crore. Companies with a face value more than that are eligible for an IPO. Additionally, the company’s net worth must be at least Rs. 1 crore.

• The company should have a website where investors may acquire information that aids in their investment decision.

• The corporation should enter into a contract with the depositories and commit to support trading in demat securities.

• One year before to submitting an IPO application under the BSE SME sector, the company’s promoters must stay unaltered.

• The NSE SME IPO on the national stock exchange follows identical procedures with slight variations.

Should You Invest in SME IPO?

Investing in the initial public offering (IPO) of a small or medium-sized enterprise carries a high degree of risk. Therefore, it is only appropriate for those with a high risk tolerance. Recently, SME IPOs have been gaining steam and attracting a large number of individual investors and financial institutions. SMEs seeking an IPO are in their earliest stages of business. These businesses have a promising future growth outlook. Many investors subscribe to SME IPOs due to the likelihood of obtaining substantial returns from early-stage investments.

In addition, there is no assurance that an investment in a SME will result in a profitable enterprise. If the firm is healthy, listing and post-listing gains can be lucrative. If the assumptions are incorrect, the investor may lose their entire investment.

In addition, not all SME businesses offer substantial liquidity. The top 50 businesses on both the BSE and NSE are typically volatile. It may be tough to join or leave other businesses. Thus, investing in SME IPOs requires extraordinary caution and diligence.

Bottom Line

SME IPOs bring significant value to startups and the ecosystem as a whole. Even if they are still in their infancy, the increasing popularity and benefits should establish crowdfunding as a trustworthy source of funding for small businesses.

Currently, the market capitalization and weighting of these listings are negligible, but this will change as India’s startup ecosystem continues to flourish.

In addition to the obvious advantages for entrepreneurs, SME IPOs provide investors with access to early-stage prospects that have traditionally been the domain of VCs and financial institutions. Despite the risks, individual investors have the potential to earn outsized profits because to the seemingly infinite development opportunities.

FAQ

• Are SME listed?

Yes, stocks of small and medium-sized enterprises can be listed on the stock exchange. SMEs have the option of listing on either the NSE’s Emerge or BSE’s BSE SME platforms.

• What are SME stocks?

Small and medium-sized enterprises with a high growth potential are referred to as SME stocks. BSE and NSE have established separate SME platforms, allowing innovative, early-stage initiatives and small, high-quality companies with paid-up capital of up to Rs. 25 crores to raise financing.

• Is it safe to invest SME IPO?

SME IPOs are seen as risky. Due to their freshness and size, these enterprises are vulnerable to greater market risks. In addition, instead of SEBI, the stock exchange verifies their valuation. SME IPOs are appropriate for investors with a high risk tolerance.

• How to participate in SME IPO?

By submitting an online IPO application form via their stock broker or bank, retail investors in India can participate in SME IPOs. Brokers offer online IPO applications through UPI, whereas banks offer both UPI and ASBA IPO applications.

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