What Is SME IPO? - A Comprehensive Guide

Introduction

The SME IPO full form, the small and medium enterprise initial public offering, is bringing a paradigm shift in Indian capital markets. It is well known that SMEs are the backbone of the Indian economy, but they have often received a raw deal in terms of funding and access to capital markets. 

This is changing quickly, with SME IPO platforms gaining traction and quickly turning into a robust funding source for startups. Starting with the relaxation of norms by SEBI, SMEs without an extensive track record of profitability or net worth can tap capital markets and trade on dedicated platforms such as the BSE SME and the NSE Emerge.

In the first 8 months of 2024, a total of 165 SME IPOs have contributed to a staggering ₹5,500 crores. SME IPOs continue to gain momentum, with numerous capital-starved SMEs gaining better liquidity, credibility, governance, and transparency without losing large chunks of ownership to foreign risk capital and VCs.

What is SME IPO?

As the name suggests, SME IPO means initial public offerings for small and medium-sized businesses. Instead of pitching a litany of individual and institutional investors for funds, SMEs can directly tap public markets and gain substantial liquidity in the process.

While normal IPOs have stringent regulatory and compliance requirements, SMEs have relatively relaxed regulations, 

1) The SME must have a paid-up capital of ₹3 crores or more, with the same reflecting across tangible assets and overall net worth.

2) The company's financial statements should show distributable profits for at least two out of three preceding financial years, excluding any extraordinary incomes.

3) The minimum trading lots for SME IPOs should range from 100 to 10,000 shares depending on the price, volumes, and more, which is constantly subject to revision.

4) There should be no winding-up petition against the company in any court across the country.

5) The company's promoters should remain constant for at least one year preceding the application of the SME IPO.

SME IPO Listing - How It Works?

The compliance requirements for SME IPOs are significantly lower than what is expected of mainstream offerings. However, maintaining public trust still involves substantial paperwork and a long, drawn-out process to ensure the verification of facts and data.

Here are some key steps involved in the SME IPO listing process:

1) Appointment of Merchant Banker - Despite being relatively easier, SMEs require an experienced merchant banker or SME IPO consultant to help guide them while underwriting the issue.

2) Compliance & Due Diligence - The next step involves ensuring the facts, accounts, and data presented by the company reflect the truth. There are no discrepancies that can have a material impact on the SME's story.

3) Red Herring Draft Prospectus - Similar to a regular IPO, the prospectus should contain comprehensive information on the operations and prospects of the company. This should serve as the mission statement for prospective investors.

4) Verification & Feedback - All the steps and documentation thus far undergo thorough verification, with necessary revisions and feedback following suit. There will also be a site visit at this stage to further verify the accuracy of claims.

5) In-Principle Approval - Once all facts and data are verified successfully, the SME will receive an in-principle approval, with a few conditions pending complete approval before the issue can be opened.

6) Issue Open & Close - After all necessary approvals are taken, the issue is opened on a specific date. After marketing and advertising, it will stay open for a few days, following which it is closed, and shares are allotted.

7) Listing & Trading - Once the issue is fully subscribed and shares are allotted, it will start trading on the BSE SME or the NSE Emerge platforms for investors to buy and sell securities in the company.
The lots and sizes are set based on the price and volumes of the shares and are subject to constant monitoring for changes to facilitate easy trading and transfer. Over time, as the price and volumes improve, the stock can graduate to the main indices, cementing its position as a publicly-traded company.

Final Verdict

SME IPOs add plenty of value to startups and the overall ecosystem. Even though they remain in their infancy, the growing traction and benefits should cement this as a reliable means of fundraising for small enterprises.

At the moment, the market cap and weightage of these listings are insignificant, but they will only continue to grow as India's startup ecosystem continues to mature.

Apart from the obvious benefits for startups, SME IPOs help investors gain exposure to early-stage opportunities that have long been the purview of VCs and financial institutions. Despite the risks, retail investors stand to gain outsized returns owing to the seemingly limitless possibilities for growth.