All you need to know about SME IPO in India
The Indian financial market has seen a surge in the number of Small and Medium Enterprises (SMEs) going public in recent years. An SME IPO, or Initial Public Offering for Small and Medium Enterprises, is a platform that allows these businesses to raise capital by offering shares to the public. This article delves deep into the nuances of SME IPOs in India.
What is an SME IPO?
An SME IPO is a process where a small or medium enterprise offers its shares to the public for the first time. Unlike regular IPOs that list on the mainboard, SME IPOs list on dedicated SME platforms of stock exchanges like BSE’s SME platform or NSE’s Emerge.
Why SME IPO?
SMEs often face challenges in accessing funds from traditional sources. An SME IPO:
- Provides access to capital for growth and expansion.
- Enhances company’s credibility and visibility among clients, vendors and employees.
- Unlike loans, via IPO, company can get money for long term expansion, which is not required to pay back again ever.
- No regular cost such as interest on money received in IPO, dividend payments too are not compulsory.
- Offers an exit route for existing investors.
Eligibility Criteria
For an SME to qualify for an IPO in India, it must meet certain criteria:
- Net tangible assets of at least INR 1.5 crores.
- Track record of distributable profits in 2 out of the last 3 years.
- No change in the company’s promoters in the preceding year.
Advantages of SME IPO
- Liquidity: Shareholders can easily buy or sell shares.
- Brand Value: Listing enhances the company’s brand image.
- Attract Talent: Listed companies often attract better talent due to increased visibility.
- Capital: for expansion of business, for repayment of loans & for funding working capital
Challenges
- Regulatory Compliance: SMEs need to adhere to SEBI guidelines, which can be stringent. A good CA can handle this well.
- Cost: The process can be expensive due to underwriting, legal, and regulatory fees. It may cost close to 6 – 10% of IPO size just one time (not annual).
- Market Volatility: Share prices can be volatile, affecting the company’s valuation, but it does not affect company’s day to day operations in any manner.
Process of SME IPO
- Appointment of Merchant Banker: The first step is to appoint a merchant banker to guide through the process.
- Due Diligence: The merchant banker conducts a thorough check of the company’s financial and legal aspects.
- Draft Prospectus: A draft prospectus is prepared and submitted to SEBI for approval.
- Pricing: The company, along with the merchant banker, decides the price band of the shares.
- Listing: Once approved, the shares are listed on the SME platform of the chosen stock exchange.
SME IPO vs Mainboard IPO
While both are routes to go public, there are differences:
- Size: SME IPOs are smaller in size compared to mainboard IPOs.
- Regulations: SMEs enjoy certain relaxations in regulatory requirements.
- Investor Base: Institutional investors predominantly invest in mainboard IPOs, while retail and individual investors are more common for SME IPOs.
Conclusion
SME IPOs in India have opened a new avenue for small and medium enterprises to access capital and grow. While there are challenges, the benefits often outweigh the drawbacks. As the Indian economy continues to grow, the role of SMEs and their contribution to the capital market cannot be overlooked.
Are you an SME looking to explore the world of IPOs? Don’t navigate this journey alone.
Contact us today for a FREE consultation on SME IPOs, and let our experts guide you every step of the way. Your growth story deserves the right audience. Let’s write it together!
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