A Comprehensive Guide to SME IPOs in India: Unlocking Growth for Small and Medium Enterprises

By Rupin Chopra and Shantam Sharma

In recent years, Initial Public Offerings (IPOs) have emerged as a significant avenue for companies to raise capital by offering shares to the public. Among these, a specialized segment known as SME IPOs (Small and Medium Enterprises Initial Public Offerings) has gained traction, particularly within the Indian market. According to the Reserve Bank of India, this surge in IPOs is largely attributed to increased interest and the “massive” oversubscriptions observed in the SME segment. Notably, India recorded the highest number of public listings globally , accounting for 27% of the total in the first half of 2023-24, with the SME segment playing a crucial role. Furthermore, the country contributed to 9% of the total proceeds raised from IPOs worldwide.

What is an SME IPO ?

An SME IPO, like a traditional IPO, is a method through which small and medium enterprises raise capital by offering shares to the public. Once the IPO is completed, these shares are listed on a stock exchange, allowing investors to buy and sell them. This process enables SMEs to obtain the necessary funds to expand, innovate, and solidify their market presence.

SMEs play a critical role in driving economic growth. They occupy the middle ground between large corporations and startups, contributing significantly to job creation, innovation, and industrial development. SME IPOs allow these businesses to scale up by gaining access to larger pools of investment, enabling further growth in sectors such as manufacturing and services.

SME IPO Exchanges in India

In India, SME IPOs are primarily listed on two specialized platforms:

1. BSE SME Exchange: Operated by the Bombay Stock Exchange (BSE), this platform facilitates the listing of SME IPOs, providing visibility and liquidity to smaller companies.
2. NSE Emerge: The National Stock Exchange (NSE) operates this platform to promote the growth of SMEs by providing them access to capital markets, thereby enabling their growth and expansion.

Both exchanges focus on supporting SMEs through a simplified listing process, reduced regulatory burdens, and tailored compliance requirements.

Eligibility Criteria for SME IPOs

For a company to be eligible to list an SME IPO, it must meet specific criteria:

1. Post-issue Capital Requirement:
• The post-issue paid-up capital of the SME must be ₹10 crore or less (USD 1.2 million approx.).
• If the post-issue capital is between ₹10 crore (USD 1.2 million approx.) and ₹25 crore (USD 3 million approx.), the issuer can still make an SME IPO under certain conditions.
2. Track Record and Other Conditions:
• The SME must satisfy the track record and other eligibility conditions set forth by the SME exchanges where they propose to list their shares.
• In the case of SMEs that were previously partnership firms or LLPs, their financial statements must conform to the format prescribed under the Companies Act, 2013.
3. General Conditions:
• The issuer must apply for listing on at least one SME exchange and designate one exchange as the primary exchange.
• The company should ensure that all securities held by promoters are dematerialized, and any existing partly paid-up shares have been either fully paid or forfeited.

These conditions aim to ensure that SMEs listing their shares meet minimum financial and operational standards while also safeguarding investor interests.

The SME IPO Process

The process of listing an SME in the Indian securities market follows a streamlined path designed to accommodate smaller businesses:

1. Appointment of Underwriter: The company must appoint an underwriter, who assists in determining the offering price and underwrites the risks associated with the IPO.
2. Preparation of DRHP (Draft Red Herring Prospectus): The company, with the underwriter’s help, prepares a DRHP that provides comprehensive information about the business, financials, and the specifics of the IPO.
3. Regulatory Approval: Once the DRHP is ready, it is submitted to the Securities and Exchange Board of India (SEBI) for approval.
4. IPO Promotion and Launch Date Announcement: After regulatory clearance, the company promotes the IPO to potential investors and announces the launch date.
5. IPO Launch and Share Allotment: On the specified date, the IPO is launched, and shares are allocated to investors based on the level of subscription.

Through these steps, SMEs can access public capital and begin trading their shares on the stock exchange.

Key Features of SME IPOs

SME IPOs come with several distinctive features that cater to the needs of smaller businesses. These include:

1. Appointment of Underwriter: The company must appoint an underwriter, who assists in determining the offering price and underwrites the risks associated with the IPO.
2. Preparation of DRHP (Draft Red Herring Prospectus): The company, with the underwriter’s help, prepares a DRHP that provides comprehensive information about the business, financials, and the specifics of the IPO.
3. Regulatory Approval: Once the DRHP is ready, it is submitted to the Securities and Exchange Board of India (SEBI) for approval.
4. IPO Promotion and Launch Date Announcement: After regulatory clearance, the company promotes the IPO to potential investors and announces the launch date.
5. IPO Launch and Share Allotment: On the specified date, the IPO is launched, and shares are allocated to investors based on the level of subscription.

Through these steps, SMEs can access public capital and begin trading their shares on the stock exchange.

Key Features of SME IPOs

SME IPOs come with several distinctive features that cater to the needs of smaller businesses. These include:

1. Simplified Regulatory Compliance: The regulatory requirements for SME IPOs are more relaxed compared to those for larger companies, making the process accessible to smaller enterprises.
2. Enhanced Visibility: Listing on a recognized stock exchange boosts an SME’s visibility and credibility, attracting potential investors and business partners.
3. Institutional Support: Regulatory bodies and financial institutions often provide support to SMEs, easing their entry into the capital markets.
4. Retail Investor Participation: SME IPOs are structured to encourage participation from retail investors, creating a broader investor base.

Advantages of SME IPOs

Opting for an SME IPO offers several advantages to companies:

1. Access to Capital: The primary benefit is the ability to raise capital from public investors, providing funds to fuel growth, research and development, or pay down debt.
2. Enhanced Visibility: Listing on a recognized stock exchange boosts an SME’s visibility and credibility, attracting potential investors and business partners.
3. Institutional Support: Regulatory bodies and financial institutions often provide support to SMEs, easing their entry into the capital markets.
4. Retail Investor Participation: SME IPOs are structured to encourage participation from retail investors, creating a broader investor base.

Conclusion

For SMEs, going public through an IPO represents a transformative step. It allows them to raise significant capital, enhance their market visibility, and leverage strategic opportunities. The simplified regulations governing SME IPOs make the process more accessible to smaller companies, empowering them to contribute to India’s economic growth.
As SME IPOs gain momentum, businesses and investors alike can benefit from understanding the mechanics of this process and the long-term potential it holds. For those interested in exploring SME IPOs, it is crucial to stay informed about the latest regulations and market trends, as the evolving landscape continues to present new opportunities for growth.