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IR Smart Class: SME IPO

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Shiv Joshi
Shiv Joshi
An editor with over 20 years of experience across industry verticals and content formats from tabloids to magazines, he is the Deputy Group Managing Editor at Images Group.

Frequently asked questions about Initial Public Offering (IPO) for small and medium retail businesses answered

Small businesses are an important driver of India’s economy, contributing to over 27% of the country’s GDP.

As of June 2023, the government’s portal that registers micro small and medium enterprises (MSMEs)—Udyam—had 20.09 million MSMEs. These included 19.4 million micro-enterprises, 554,000 small enterprises, and about 52,000 medium-sized enterprises.

With the changing consumption environment in the country, such businesses too are aspiring to evolve with the changing times.

“Regional businesses today want to adopt modern practices and expand at a rapid rate to meet the needs of the modern consumer and compete with global retailers,” said Vikram Bothra, managing director, Chandan Retail Pvt. Ltd. who runs Askaran Binjraj, a 50,000 sq. ft. stand-alone fashion and lifestyle department store in Assam.

“However, while the government lends its support to small and medium (SMEs) businesses, they face hurdles in accessing funds. It is to facilitate this access that the Securities and Exchange Board of India (SEBI) has launched an Initial Public Offering (IPO) product for small and medium businesses (SMEs) to fund their dreams,” added Bothra.

Bothra is among hundreds of SME businesses that are considering the IPO route to fund their expansion plans.

Here’s what an SME IPO entails.

What is an SME IPO?

This is a way for small businesses to raise funds through the equity markets. This product was launched by SEBI in partnership with the Bombay Stock Exchange (BSE) and National Stock Exchange (NSE) in 2012.

As per Trendlyne data quoted by Mint, in 2023, as many as 234 companies have raised funds from the markets. Out of these, 176 companies were from the SME category. The number was 103 in 2022, 52 in 2021 and 31 in 2020 as well as 2019.

Are SME IPOs same as regular IPOs?

No. SME IPOs differ from regular or mainboard IPOs in many ways. To begin with, the eligibility criteria for SME IPOs are much more relaxed as compared to mainboard IPOs.

Post the IPO, the paid-up capital of SME has to be between Rs 1 crore and Rs 25 crore as opposed to a minimum post-IPO paid-up capital of Rs 10 crore for mainboard issues.

The minimum number of allottees for an SME IPO is 50 while that for mainboard IPOs is 1,000.

Furthermore, SMEs do not have to meet time frames, track records and reporting requirements for IPO listing.

The offer documents are to be submitted to the stock exchange on which the company intends to list itself and not with SEBI. The stock exchange then examines and approves the offer documents. SME IPOs are not subject to SEBI observation.

The time frame for an SME IPO is three to four months as opposed to six months for a mainboard IPO.

The average application size for an SME IPO is a minimum Rs 1 lakh for one lot and that for a mainboard IPO is Rs 10,000 to Rs 15,000.

Most importantly, an SME IPO can only be listed on one exchange, unlike a mainboard IPO which can be listed on both BSE and NSE.

SME IPOs need to be 100% underwritten, with Merchant Banker underwriting of 15%. This is mandatory. In the case of IPO mainboard IPOs underwriting is not mandatory (Under 50% compulsory subscription to QIBs)

Tell me more about the exchanges for SME IPO

In 2012, the NSE opened NSE Emerge and BSE launched BSE SME for the listing of SME IPOs.

Around 477 companies have been listed on BSE SME to date with a market cap of Rs 1,22,002.42 crore. They raised Rs 6,015.00 crore.

In August 2023, the platform had 341 SMEs listed on it with Gujarat leading the band with 30% of companies hailing from the state.

The eligibility criteria for an SME IPO as described by HDFC Bank are:

  1. The SME should be incorporated under the Companies Act, 1956.
  2. The SME should have a face value (post-issue paid-up capital) of up to ₹25 Crore.
  3. The SME’s net tangible assets should be worth ₹1.5 Crore.
  4. The SME must have a track record of a minimum of three years if it was formed by converting partnership/proprietorship/LLP firms.
  5. The SME should have a website.
  6. The company’s promoters should not change for at least a year after filing the IPO.
  7. The SME should agree to trade in Demat securities.
  8. The SME should enter into a contract with the depositories.

What is the SME listing procedure?

  1. The company that wants to get listed must first appoint an underwriter who is a merchant banker.
  2. The company must prepare an offer document called the Draft Red Herring Prospectus (DRHP) with the help of the underwriter.
  3. It must get the DRHP verified by the desired Stock Exchange.
  4. Upon approval, it must announce its IPO launch date.
  5. The final step is to launch the IPO on the opening date.
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