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IPO stands for Initial Public Offering. This is a process whereby a company that is privately owned and may have been run by family members, friends, or selected investors, now wants to expand its business and raise capital. It then wants to go public for the first time and sell a portion of its shares to the general public in the form of stock.
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SME stands for small and medium-sized enterprises. It is a classification made by the Indian government. These companies have revenues, assets or a number of employees below a certain threshold (see below):
SME Business Classification
|
Criteria |
Small Enterprise |
Medium Enterprise |
|---|---|---|
|
Investment in Plant and Machinery or Equipment |
Not more than Rs 10 crore |
Not more than Rs 50 crore |
|
Annual Turnover |
Not more than Rs 50 crore |
Not more than Rs 250 crore |
Small and medium enterprises raise funds to develop and expand their business. The most common ways SMEs raise funds are through debt financing, bank loans, and initial public offerings. Fundraising helps SMEs expand their business and prevents them from failing due to lack of funds.
A SME IPO is an initiative in which a small and medium-sized company decides to sell shares to the public for the first time in order to raise funds and list itself on the stock exchange. Technically, it is a public capital raising tool where the company reaches a stage where it proves to be capable of growth and wants to raise funds that contribute to a faster growth rate of the SME.
Yes, the IPO platform for SMEs (small and medium enterprises) was introduced by SEBI in 2012 to provide a separate platform for listing. The listing requirements are more relaxed and the cost is lower than a mainboard IPO. This is a useful way for SMEs to raise capital, as IPOs provide a platform for SMEs to:
From an investor's perspective, they can invest in smaller companies with faster growth potential.
Content:
An SME IPO is the first time a small and medium-sized company sells shares to the public. SME IPOs help companies raise capital and get listed.
SME IPO is the acronym for Small and Medium Enterprise Initial Public Offering. Raising funds through IPOs helps SMEs do the following:
In 2012, the NSE Emerge and BSE SME platforms were launched in India. This enabled small and medium enterprises to raise equity through public offerings. The process for SME IPO takes 3 to 4 months in most cases.
The issuing company must choose one of the two SME platforms. Unlike the mainboard IPO shares, the SME shares are listed on only one exchange.
The object of the issue tells investors how the company intends to use the funds raised from the public. They are stated in the offer documents. At a high level, they are divided into two parts:
Fresh issue is the issuance of new shares of the company and their sale to investors. The funds raised are intended for use in the company.
Offer for Sale is the sale of shares by an existing promoter or investor. The company does not receive any proceeds from the OFS. All proceeds go to the selling shareholders in the amount of their pro-rata contribution for the offer for sale.
The Fresh Issue and the OFS may be used individually or in combination. Most companies intend to use the proceeds of the offering for the following purposes:
An SME IPO helps companies raise low-cost capital in the capital market. This helps the companies to expand their business and provides adequate capital infusion. This route also creates wealth for the promoters and shareholders of the company.
Here are some important reasons why an SME company should seek an IPO:
IPOs help companies raise capital by selling shares to the public. The issuer has to pay the expenses incurred in going public. But, there are no recurring costs or interest payments associated with the funds raised through an IPO.
An IPO increases financial stability and improves the credibility of the company. This leads to:
An IPO increases the investor base for the shares of the company. It provides growth opportunities such as expansion through secondary offerings, including private placements.
SMEs play an important role in social and economic development. SME growth and expansion increase business and employment opportunities in a country.
An IPO provides liquidity to shareholders and promoters. This results in providing companies with several growth opportunities, such as expansion and mergers and acquisitions.
A capital increase provides existing investors with easy exit options. It also allows new investors to invest in the company. Shareholders and investors in the company can sell their shares and exit through an offer for sale.
Raising funds through an IPO helps reduce the company's debt by refinancing or paying off the company's debt.
Going public gives the company greater visibility in the media and helps promote the brand. This improves the credibility of a company over an unlisted company.
SME IPOs help companies grow their business and expand their operations. They also facilitate access or migration to the main board platform for a stable and long-term future and expansion.
Like all financial instruments, SME IPOs also have some risks. These should also be understood:
There are costs associated with raising funds through an IPO. Direct costs include merchant banker fees, underwriting commission, market maker fees, registrar fees, legal fees, audit fees, and filing fees. In addition, the company must also spend money on advertising, road shows, and PR activities.
The costs of an SME IPO vary depending on the size of the IPO, the services used, and the expenses incurred for advertising the IPO. They range from Rs 50 lakhs to a few crores.
When a company goes public, information about financial details, executives, corporate transactions, violations related to management, and any other important information becomes public.
When listed shares do not perform well on the stock market, the company's valuation decreases. This affects the reputation of the company, the promoters and its brands. It also affects the promoters, management and employees.
Many challenges can affect the company, such as poor industry performance, poor industry outlook, newly introduced higher taxes, low industry profitability that may lead to poor stock performance.
Often SME IPOs are withdrawn at the last minute, due to various reasons. These include:
In this case, the company has to bear the cost of the IPO.
In a SME IPO, 40% to 70% of small investors sell the shares in the first 2 weeks. This is done to make a quick profit or to book losses and invest the funds in another IPO.
The massive selling of these shares leads to sharp fall in prices. Some companies hire fund managers or wealthy investors to buy such shares to stabilize the price. Once the price has stabilized, the fund manager's responsibility comes to an end.
The role of such hired fund managers is very limited which comes at an additional cost. This is beyond the role of the market maker in a SME IPO.
SMEs with a minimum post-issue capital of Rs 1 crore and a maximum capital of Rs 25 crore can apply for an IPO through the SME platform. Mainboard companies are the large companies with paid-up capital of at least Rs 10 crore after the issue.
Although the shares of both, SMEs and mainboard companies, are listed on the proposed exchanges, the listing criteria and procedure for mainboard and SME IPOs are different. The main differences between mainboard IPOs and SME IPOs are described below:
|
Listing parameters |
Mainboard IPO |
SME IPO |
|---|---|---|
|
Post-issue paid-up capital |
A minimum of Rs 10 crore is required. |
Minimum of Rs 1 crore and a maximum of Rs 25 crore. |
|
Minimum allottees in the IPO |
Minimum number: 1000 allottees |
Minimum number: 50 allottees |
|
IPO underwriting |
Non-mandatory |
Mandatory: Merchant Banker underwrites 100% of the risk, with the company doing 15% of the underwriting. |
|
Offer document vetting |
By SEBI |
By Exchange |
|
IPO Timeframe |
6 months onwards |
3 to 4 months. |
|
IPO application size |
INR 10,000 -15,000 Lakh |
Min: INR 1 Lakh |
|
Participation of the QIB |
50% compulsory subscription by QIBs |
Not Mandatory |
|
Market making (acting as an agent for the purchase and sale of shares) |
Not mandatory |
Mandatory (for 3 years from the date of listing) |
|
Track Record |
Stringent track record norms |
Relaxed track record norms |
|
Listing |
Can list on both exchanges |
Can list on only one exchange. |
Company's paid-up capital is restructured in the pre-IPO phase. SME companies use Bonus Issue or Buyback to bring the post issue paid-up capital between Rs 1 Crore to Rs 25 Crores.
Example of how an SME company reallocates capital to be eligible for SME IPO:
Let's say an SME Company has:
To increase paid-up capital:
SME IPO Public Issue:
Post-IPO shareholding:
Thus:
Post-Issue Paid Up Capital = 1.336 Cr * Rs 10 FV = Rs 13.36 Cr (which is below Rs 25 Cr).
If the company issues shares at Rs 100 price (Rs 10 FV + Rs 90 Premium), the Rs 90 goes to reserve and surplus.
SME Company Owners
We could help you get listed on the stock market.
Check our SME IPO Guide 
The process by which small and medium-sized enterprises (SMEs) raise money from the public is known as SME IPO.
Companies with a minimum post-issue capital of Rs 1 crore and a maximum of Rs 25 crore are eligible for SME IPO in India. BSE SME and the NSE Emerge platforms enable SMEs to raise money and get listed on the stock exchange through SME IPO.
Unlike main board IPOs, SME IPOs are small. They are governed by different rules set by regulators and exchanges.
The biggest challenge for SMEs is raising capital. Going public allows SMEs to expand their operations while increasing public interest in their services or products.
When SMEs go public, the shareholder's value also increases.. It also provides investors and companies with additional investment instruments at their disposal.
SMEs can go public to raise funds for a variety of purposes:
Additionally, issuing an IPO also helps SME companies with:
For SME companies
SMEs may opt for IPO to raise funds and get listed on the stock exchange. If they raise funds through bank loans, they have to pay interest or repayments. SMEs do not have to pay interest when they go public to raise funds. The IPO process increases the visibility of the company's products and creates a brand image. The IPO roadshow makes the company known to people who are not yet aware of its operations.
The reasons why SMEs should go public are the following:
For investors
SME IPOs offer retail investors the opportunity to invest money in an SME company. These companies are in the early stages of growth and can offer high returns in the future.
If selected carefully, SME IPO can offer better returns compared to mainboard IPOs on the stock market or other investments.
Once listed on the stock exchange, SME shares are traded in the same way as any other listed shares. The only difference is that SME shares are traded in a minimum lot size of Rs 1 lakh. For example, if an SME share costs Rs 40, you have to buy at least 4000 shares. The share for this company is traded in a lot size of 4000 shares.
SMEs can raise money through IPOs and grow their businesses in every way, including:
The IPO provides an opportunity for new investors to participate in the IPO, while current shareholders can sell their shares through a tax-efficient exit route.
An IPO has a positive impact on a company's name recognition, image, and brand expansion.
Information about the company's product range, management and finances is made available to investors in the offering documents. This increases the level of awareness of the company.
SME IPO was launched in India in 2012.
The NSE Emerge and BSE platforms were launched with the aim of enabling fundraising for SMEs through IPOs.
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