All about SME IPO

SME IPO, as the name suggests, is when a company, especially Small and Medium Enterprises, offers its shares to the public. Before diving deep into the topic, we will cover some basic information for people who do not know what an IPO is.

IPO: An initial public offering (IPO) is a means for companies to raise capital for themselves. This is done by offering the stocks to the public. Done by a company that is privately owned, this is seen as a significant milestone for those that look to expand and invest in new projects. SMEs today are the backbone of any industry, and now they have started to come into this sector as well.

In this article, we will cover everything and anything that an individual might need to know about SME IPO. Read ahead to find out more.

Difference between SME IPO and main IPO

Before diving deep into the topic it is important to know that Main Board IPOs and SME IPOs are the two categories of initial public offerings available. The primary distinction between the two lies in the issue size, with main board IPOs having larger issue sizes compared to IPOs by small and medium-sized corporations. Additionally, there are other differences pertaining to paid-up capital, minimum number of allottees, IPO prospectus vetting, underwriting, minimum application size, and market making.

1. Definition

SME IPO is an abbreviation for Small and Medium Enterprises Initial Public Offering, which is tailored for small and medium-sized enterprises aiming to raise funds from the public markets.

Mainboard IPO, on the other hand, refers to the initial public offering carried out on the mainboard of a stock exchange, typically by large corporations with significantly more operations and financial stability.

2. Eligibility Criteria

For SME IPO, companies must fulfill specific eligibility criteria established by regulatory bodies, including minimum net worth, track record, and profitability.

In contrast, companies eyeing a mainboard IPO must meet more rigorous eligibility standards than SMEs, which may involve a higher minimum market capitalization, longer operational history, and a proven track record of profitability.

3. Regulatory Framework

SME IPOs are overseen by the SME exchange platform, a dedicated section of the stock exchange designed to meet the requirements of small and medium-sized enterprises.

Mainboard initial public offerings are subject to the regulatory guidelines of the mainboard section of the stock exchange, which complies with the wider regulatory requirements that are relevant to all companies listed on the exchange.

4. Market Exposure

SME IPOs generally have less market exposure in comparison to mainboard IPOs. This is because SMEs are smaller in size and scale, which may result in lower interest from institutional investors and analysts.

Mainboard IPOs offer increased market visibility by being listed on the mainboard section of the stock exchange, attracting a larger number of investors and garnering more attention from the media.

5. Funding Potential

SME IPOs provide SMEs with the opportunity to raise capital from the public markets, although the funding potential may be somewhat limited in comparison to mainboard IPOs.

Mainboard initial public offerings provide a significant opportunity for funding, enabling major companies to secure substantial capital for their growth and expansion strategies.

Eligibility for an SME IPO

India has two types of platforms for SME IPOs. The first is BSE SME, and the second is NSE Emerge. Any company should choose between them for their IPO. The small and medium-sized enterprise (SME) firm must satisfy the SME IPO eligibility standards established by the stock exchanges and SEBI. Both the BSE and NSE exchanges have fairly comparable prerequisites for an SME IPO.

1. The Small and Medium Enterprise (SME) must be registered under the Companies Act, 1956.

2. The SME's net tangible assets should amount to ₹1.5 Crore.

3. The SME is required to have a track record of at least three years if it was established by converting partnership/proprietorship/LLP firms.

4. The SME must maintain a website.

5. The promoters (leaders)4r of the company should remain unchanged for a minimum of one year after the IPO filing.

6. The SME must agree to trade in Demat securities.

7. The SME should establish a contract with the depositories.

SEBI Exchange: What Is It?

A corporation must satisfy certain requirements outlined by SEBI to have its shares listed on a mainstream stock exchange. To easily list companies on the stock exchange and help MSME companies raise capital from the stock market, SME Enterprise was founded. SME Exchange stands for Small and Medium Enterprise Exchange. Created by the Stock Exchanges in India, it is a separate trading platform used for listing and trading companies with small market capitalization.

The two most popular SME exchanges in India are:

• BSE SME platform. This is operated by the Bombay Stock Exchange.
• NSE Emerge platform. This is operated by the National Stock Exchange.

For the benefit of our readers' understanding, it is important to note that SME Exchange operates within the mainboard exchange of both BSE and NSE. Consequently, trading on the SME platform mirrors trading on the mainboard exchange. Investors with access to BSE and NSE stocks will also have access to SME stocks.

Why Did It Start?

The difficulties SMEs face in being visible and drawing sufficient trading activity when listed alongside other companies on the major exchanges gave rise to this idea. SME Exchange provides entrepreneurs with a great opportunity to obtain equity funding for the development and expansion of SMEs. Small and medium-sized businesses (SMEs), who frequently struggle to get listed on the main exchanges, can trade their shares on this specialised stock exchange.

How well the SME IPO did in the last year?

SME IPOs have been booming in the last few years, so much so that this year 22 of them have been multibaggers. In 2023, the number of SME IPOs was 182, raising the total sum to Rs. 4967 crore. However, this year, 2024, the number has been 120, raising the total sum to Rs. 4085 crore. In the last ten years, the BSE SME IPO Index has thrived, demonstrating yearly gains of as much as 195%. The attraction of SMEs as a profitable investment option is further supported by the most recent listing data.

Is it safe to invest in SME IPO?

Knowing all that, the readers and investors must be curious: Is it safe to invest in an SME IPO? Well, the answer is not as easy as it seems. In the case of the SME IPO, people say that there is high risk involved, but as we know: Higher the risk, Higher the reward. The same is the case here. The amount of SMEs choosing to go public through IPOs has been steadily increasing, and it is expected that this trend will persist in the future.

Investing in the same is considered risky because SME IPOs do not offer liquidity options. Moreover, the minimum investment needed for the same is more than Rs. 1 lakh. High net worth Individuals with the capacity to take higher risks can easily opt for this. Also, upon doing the needed research, if one feels that they can go for it, then sure, the sky is the limit.

Conclusion

SME IPOs have garnered significant attention in recent years. Not only retail investors, but also various financial institutions are now participating in these offerings. SMEs typically opt for an IPO during their early stages of business, showcasing potential for future growth which attracts investors to fund these ventures. However, investing in SME IPOs comes with a substantial amount of risk, as there is no certainty regarding the business's success. Many investors are enticed by the prospect of gains from listing and post-listing, which can yield high returns if the company prospers. Nonetheless, there is also a chance of losing the entire investment if the business does not succeed. Therefore, it is better advised that before making any decision and investing your money, one must do the needed research.

(The above article was researched and compiled by Sneha Tiwari, Senior Content Writer at TradeIndia. An avid reader, Sneha writes on various topics, including business, fashion and sports.)