SME IPOs: What They Mean, How They Work, and How to Invest

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A fast-paced, growing economy like India results in increasing traction in the stock market. The Indian stock market has witnessed an influx of new investors and companies lately. The growing uptick in the number of Demat accounts indicates that new investors are willing to invest in the stock market. At the same time, more companies are listing themselves on the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE) by launching their Initial Public Offerings (IPOs). Through an IPO, the company is able to raise funds to undertake various business expansions and fulfil operating obligations in exchange for allowing the public to become investors in the company.

What’s more, it’s not only large companies that want to launch their IPO and go public. As you know, a young economy like India is home to many small and medium-sized enterprises, commonly abbreviated as SMEs. These SMEs play a vital role in aiding the Indian economy to flourish by providing job opportunities in the country. The Government of India is also promoting these small businesses and startups in several ways, including helping them raise capital through IPOs. In this blog, we will learn about SME IPOs in detail.

What is an SME IPO?

So, before we go into the meaning of SME IPOs, let’s clearly define both terms individually.

SME meaning:

Small-sized enterprises are those companies with an annual turnover of between ₹5 crore to ₹150 crore and an investment threshold of ₹1 crore to ₹10 crore. Likewise, a medium-sized enterprise has an annual turnover of over ₹250 crore and an investment threshold of not more than ₹50 crore. The annual turnover is nothing but the annual revenue or gross income.

IPO meaning:

An IPO is the process of the company raising funds by offering its shares to public investors for the very first time.

SME IPO Meaning:

So, as the name suggests, an SME IPO is simply the process through which small and medium-sized enterprises in India raise funds from a public offering.

These IPOs are different from the regular mainline IPOs, which are for the bigger companies since these smaller companies may not be suitable investments for all kinds of investors. Hence, an SME IPO is also listed on a separate platform and not on that of a mainline IPO. In other words, an SME IPO is not listed on the NSE and BSE. Instead, they are listed on two special platforms—the BSE SME by the Bombay Stock Exchange and the NSE EMERGE by the National Stock Exchange.

What is the SME IPO Listing Criteria?

To list on the BSE SME or the NSE EMERGE as an SME IPO, the company needs to fulfil the criteria mentioned below.

  • The company’s paid-up capital after the issue should be less than ₹25 crore.
  • The net tangible assets of the company should not exceed ₹1.5 crore.
  • The minimum public shareholding post the issue must be at least 25%.
  • The SME must have its official website.
  • The company’s promoters should not change after applying for the IPO for at least one year.
  • The SME IPO must have at least 50 investors subscribing to the IPO.

How does SME IPO Listing Work?

To file for an IPO, the concerned SME first selects an underwriter, also called a merchant banker, who evaluates the company’s financials. The banker then helps define the company’s capital structure, and then the company may hire additional bankers to prepare its DRHP (Draft Red Herring Prospectus). This document contains detailed information about the company. While the DRHP of regular IPOs is reviewed by the Securities and Exchange Board of India (SEBI), in the case of SME IPO, the stock exchange conducts the review, and after approval, it is made public. The company then starts deciding the issue price and the dates, and then they market the offering to attract investors. Investors can then apply for the IPO on the subscription date. Finally, the shares are allotted to the investor and then listed on the BSE SME and the NSE EMERGE.

SME IPO vs. Normal IPO: Key Differences

Following are the key differences between the SME IPO and the normal:

  • Company size: The SME IPOs are for small and medium enterprises with post-issue paid-up capital between ₹10 cr and ₹25 cr. Normal IPOs, on the other hand, are for larger companies with 100s of crores valuations.
  • Listing: SME IPOs are listed on SME exchanges like BSE SME and NSE Emerge. Meanwhile, the normal IPOs are listed on main stock exchanges like NSE and BSE.
  • Compliance: SME IPOs have relaxed compliance and disclosure requirements as compared to main IPOs in the share market.
  • Issue size of an IPO: SME IPO issue sizes are much smaller—usually under ₹25 crore. However, normal IPOs tend to be large offerings above ₹100 crore.
  • Risks: It’s important to note that SME IPOs are often perceived as riskier compared to main IPOs because of the smaller companies’ lower credibility and shorter track record, which can influence investor decisions.

How to Invest in an SME IPO?

Now, let’s look at how you, as an investor, can apply for an SME IPO. The process for applying for an SME IPO is no different than that of a regular IPO. You will need to have a Demat account; if you don’t own one, you can instantly open a free account with Share India. On your trading app, select the IPO tab, and you will find all IPOs that are open for subscription. Select the SME IPO, place your bid, and block your funds. If you wish to learn about this, read our article on how to apply for an IPO.

That said, note that the minimum application size for SME IPOs is much larger than regular IPOs. For regular IPOs, applying for a single lot would cost you around ₹15,000. On the other hand, if you want to apply for an SME IPO, it would cost you around ₹1 lakh since the issue size is bigger.

Conclusion

SMEs are the backbone of the Indian economy, and the government has taken several initiatives to support these businesses. Through an SME IPO, a small or medium-sized enterprise is able to fund to carry out various expansions and other business commitments. However, as a retail investor, you must do your due diligence before investing in SME IPOs. The small size of the company and the larger capital requirements make these companies riskier than regular IPOs. Hence, it is best if you evaluate your financial situation and put in some extra effort before considering investing in SME IPOs.

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