Introduction to SME IPO

Small and Medium Enterprises (SMEs) are a vital part of the economy, contributing significantly to innovation, job creation, and overall economic growth. In India, SMEs are classified based on their revenue, assets, or number of employees, as defined by the Indian government. These enterprises, while smaller in size compared to large corporations, often have immense growth potential. However, to realize this potential, they often require additional capital. This is where an SME IPO (Initial Public Offering) comes into play—a strategic move that allows SMEs to raise funds by selling shares to the public for the first time.

Understanding SME IPO

An SME IPO is a public capital-raising tool where a small or medium-sized company decides to offer its shares to the public for the first time. This process enables the company to raise funds and list itself on a stock exchange. Unlike Mainboard IPOs, which are typically conducted by larger, well-established companies, SME IPOs have more relaxed listing requirements and lower costs, making them more accessible to smaller enterprises. The IPO platform for SMEs was introduced by SEBI (Securities and Exchange Board of India) in 2012, to provide a separate platform for SME listings, such as NSE Emerge and BSE SME.

SME Business Classification

SMEs in India are classified based on their size, which is determined by factors such as revenue, assets, or number of employees. The classification helps identify the businesses that fall under the SME category and are eligible for certain benefits and schemes provided by the government.

Why Do SMEs Opt for IPOs?

SMEs raise funds to develop and expand their business. The most common methods of fundraising include debt financing, bank loans, and IPOs. Among these, an IPO offers several unique advantages:

  1. Access to Capital: Raising funds through an IPO provides SMEs with the capital needed to expand their operations, enter new markets, or invest in new technology.
  2. Increased Credibility: Listing on a stock exchange enhances the company’s visibility and credibility, making it more attractive to customers, partners, and investors.
  3. Liquidity for Shareholders: An IPO provides an opportunity for shareholders, including promoters and early investors, to liquidate their holdings.
  4. Talent Attraction and Retention: Public companies can offer stock options and other equity incentives to attract and retain top talent.
  5. Growth and Expansion: The capital raised through an IPO can be used to fund growth initiatives, such as acquisitions or entering new markets.

SME IPO Platforms in India

In India, SME IPOs are listed on specialized platforms like NSE Emerge and BSE SME. These platforms were launched in 2012 to provide a dedicated marketplace for smaller enterprises to raise equity through public offerings. The process for an SME IPO typically takes 3 to 4 months, during which the company must choose one of these platforms. Unlike Mainboard IPO shares, SME shares are listed on only one exchange.

Objects of the Issue for SME IPO

The “Objects of the Issue” section in the offer document tells investors how the company intends to use the funds raised from the public. These objects are usually divided into two main categories:

  1. Fresh Issue: This involves the issuance of new shares by the company, with the proceeds being used for the company’s growth and development.
  2. Offer for Sale (OFS): In an OFS, existing promoters or investors sell their shares. The company does not receive any funds from the OFS; instead, the proceeds go to the selling shareholders.

The Fresh Issue and OFS can be used individually or in combination, depending on the company’s needs. Common purposes for using the proceeds include meeting working capital needs, corporate expansion, acquiring new businesses, investing in strategic joint ventures, and more.

Advantages of SME IPOs

SME IPOs offer several advantages to companies looking to raise capital and expand their business:

  1. Interest-Free Capital: Unlike loans, the funds raised through an IPO do not require interest payments or repayment. The only costs involved are the expenses incurred in going public.
  2. Improved Value Creation: An IPO enhances the financial stability and credibility of the company, leading to increased demand for its stock, higher valuations, and wealth creation for shareholders.
  3. Expansion and Growth: By increasing the investor base, an IPO provides opportunities for expansion through secondary offerings and private placements. This growth contributes to the economic and social development of the country by creating jobs and business opportunities.
  4. Facilitating Liquidity for Shareholders: An IPO provides liquidity to shareholders and promoters, offering growth opportunities such as mergers and acquisitions.
  5. Easy Exit Option: Raising capital through an IPO allows existing investors to exit the company easily. New investors can also enter the company through the IPO.
  6. Reduced Debt Burden: The funds raised can be used to refinance or pay off existing debt, reducing the company’s debt burden.
  7. Enhanced Visibility and Image Building: Going public increases the company’s visibility in the media and improves its brand reputation, making it more credible than unlisted companies.
  8. Migration to Mainboard: SME IPOs can serve as a stepping stone for companies looking to migrate to the Mainboard platform, ensuring a stable and long-term future for the business.

Risks and Disadvantages of SME IPOs

While SME IPOs offer numerous benefits, they also come with certain risks and challenges:

  1. Costs of the SME IPO: Raising funds through an IPO involves several costs, including merchant banker fees, underwriting commissions, legal fees, audit fees, and more. Additionally, companies must spend on advertising, roadshows, and PR activities. These costs can range from Rs 50 lakhs to a few crores, depending on the size of the IPO.
  2. Exposure to Sensitive Data: Going public requires the company to disclose financial details, executive information, corporate transactions, and other critical data, which becomes accessible to the public.
  3. Loss of Valuation: If listed shares do not perform well, the company’s valuation can decrease, affecting its reputation, as well as that of its promoters and brands.
  4. External Factors Affecting Performance: Poor industry performance, low profitability, or newly introduced taxes can negatively impact the company’s stock performance, leading to challenges in the market.
  5. IPO Withdrawal: Sometimes, SME IPOs are withdrawn at the last minute due to various reasons, such as disputes with the bank, disagreements with underwriters, or lack of key information disclosure. In such cases, the company must bear the cost of the IPO.
  6. Hiring Fund Managers to Stabilize Prices: After an SME IPO, a significant number of small investors may sell their shares quickly, causing a sharp drop in prices. Some companies hire fund managers or wealthy investors to stabilize prices, which adds to the costs.

Post-Issue Paid-up Capital Restructuring

Before an SME IPO, companies often restructure their paid-up capital to meet eligibility requirements. This may involve issuing bonus shares or conducting a buyback to bring the post-issue paid-up capital between Rs 1 crore and Rs 25 crore. For example, a company with a paid-up capital of Rs 1 lakh may issue bonus shares to increase this amount, making it eligible for an SME IPO.

Conclusion

SME IPOs offer a unique opportunity for small and medium enterprises to raise capital, increase visibility, and achieve significant growth. However, they also come with their own set of challenges, including costs, risks, and regulatory requirements. For SMEs considering this path, careful planning, thorough preparation, and expert guidance are essential to navigating the complexities of an IPO successfully.

MSMESTORY specializes in facilitating the journey toward a successful SME IPO by connecting businesses with top-tier IPO consultants and advisory professionals. Our mission is to streamline the process, making it accessible and straightforward for businesses aiming to go public on platforms like NSE Emerge and BSE SME. If you are considering an IPO, we can provide the insights and support needed to ensure a smooth and successful transition to the public market.