SME IPO: Meaning, Eligibility Criteria, How It Works

Small and Medium Enterprises are companies operating on a smaller scale with limited resources. To expand and grow their businesses, they often use an initial public offering (IPO) to raise capital from the public. These IPOs are usually known as SME IPOs.

For investors, an SME IPO can provide an opportunity to invest in growing businesses at an early stage. However, SME shares can involve higher risks, lower liquidity, and different investment conditions than mainboard IPOs.

This article explains what an SME IPO is, how it works, the eligibility criteria, its advantages, how to apply, and how it differs from a mainboard IPO.

What is an SME IPO?

An SME IPO is a process through which small and medium enterprises issue shares, raise capital from the public, and get listed on a stock exchange. In India, eligible SMEs list their stocks on dedicated SME platforms such as BSE SME and NSE Emerge.

These platforms aim to make compliance easier while ensuring transparency and investor protection.

In simple terms, an SME IPO means investing in a smaller business that may grow faster than traditional listed companies. However, it also carries higher risks and requires a minimum capital of ₹2 lakh to participate.

Also Read: Types of IPO

How does an SME IPO work?

An SME IPO follows a structured process involving the company, merchant bankers, stock exchange, regulators, and investors.

Here is the step-by-step process to understand how an SME IPO works:

Appointment of a merchant banker

The company appoints a SEBI-registered merchant banker to manage the IPO process, documentation, valuation, and regulatory requirements.

Filing the DRHP

The company prepares and files the Draft Red Herring Prospectus containing important information about its business, finances, risks, and proposed IPO.

Exchange Review

The stock exchange reviews the submitted documents, eligibility, and disclosures before providing necessary observations or approvals to proceed with the issue.

Revealing IPO Dates, Price, and Lot Size

The company announces important details, including IPO dates, price band, issue size, and minimum lot size for investors.

IPO Launch

The SME IPO opens for applications during the specified dates, allowing eligible investors to submit bids within the announced price range.

IPO Subscription

Investors place bids for shares, while subscription levels indicate the demand received from different investor categories during the issue period.

IPO Allotment

After the subscription closes, shares are allocated under applicable rules, with refunds or unblocking of funds.

IPO Listing

Allotted shares are admitted for trading on the designated SME platform, allowing investors to buy or sell them after listing.

Eligibility Criteria for an SME IPO

To qualify for an SME IPO, the company must meet specific criteria established by the Securities and Exchange Board of India (SEBI). Here are some key criteria:

• The company must be incorporated under the Companies Act of 1956.
• The face value of the post-issue paid-up capital should not exceed ₹25 crore.
• The minimum net worth requirement is ₹1.5 crore.
• An SME company’s minimum net tangible assets must be ₹3 crore, with at least 50% held in India.
• The company must have an operating profit of ₹1 crore in at least two out of the three financial years.
• The promoters of the SME should not change for one year after filing the IPO.
• All promoters must meet regulatory requirements and comply with applicable regulations.

Advantages of an SME IPO

Here are some advantages of an SME IPO for investors:

• Growth Potential:

Investors can participate in promising small and medium-sized businesses with potential for significant long-term expansion.

• Early Investment Opportunity:

An SME IPO allows investors to invest in companies at an earlier stage of their growth journey.

• Portfolio Diversification:

SME IPOs can provide exposure to emerging businesses and industries, helping investors diversify their equity portfolios.

• Potential Listing Gains:

Strong investor demand can support a favourable listing price, creating potential short-term returns for successful applicants.

How to Apply for an SME IPO?

The process of applying for an SME IPO is similar to applying for a mainboard IPO. Investors can apply online through their broker platform.

Here is the step-by-step process:

• Open a demat account
• After activation, log in to the demat account
• Check live or upcoming SME IPOs
• All SME IPO are labelled as SME for identification
• Analyse the company
• Apply to the IPO before 5 pm on the closing date.
• Enter the quantity
• Submit the application
• Complete the payment or mandate status.

SME IPO vs Mainboard IPO: Key Differences

Here are key differences between SME IPO and Mainboard IPO:

An SME IPO allows small and medium-sized companies to access public markets while giving investors an opportunity to participate in the growth of these companies. The process includes appointing a merchant banker, filing the DRHP, undergoing an exchange review, subscription, allotment, and listing.

However, an SME IPO can involve higher risks, larger investment requirements, and lower liquidity than a mainboard IPO. Investors should therefore evaluate the company’s financials, valuation, business prospects, management quality, and risk factors before applying.

FAQs

Can retail investors apply for SME IPOs?

Yes, retail investors can apply to SME IPOs through ASBA or their broking platform. However, the minimum investment is over ₹2 lakh.

Why is the minimum investment so high in an SME IPO?

The minimum investment is high in an SME IPO to encourage participation from informed investors with the capacity to take on higher risks.

What is the difference between an SME IPO and a Mainboard IPO?

There are many differences between SME and Mainboard IPOs. However, for investors in SME IPOs, the minimum investment and risk are both higher than those for Mainboard IPOs.

Where are SME IPOs listed?

SME IPOs are listed on the BSE SME and NSE Emerge platforms.