IPO stands for Initial Public Offering. This is a process whereby a company that is privately owned and may have been run by family members, friends, or selected investors, now wants to expand its business and raise capital. It then wants to go public for the first time and sells a portion of its shares to the general public in the form of stocks.

Content:

1. SME IPO meaning
2. SME IPO History
3. Objects of the issue for SME IPO
4. SME IPO Advantages and Disadvantages
5. SME IPO vs Mainline IPO
6. SME IPO limits
7. Post-Issue Paid-up Capital Restructuring

SME stands for small and medium-sized enterprises. These are the businesses governed by the Ministry of Micro, Small and Medium Enterprises and have fewer employees, few assets, smaller revenue and operate on a small scale compared to large corporations. Though the SMEs are small in size, they are the important pillars of India’s economic development. SMEs play a crucial role in employment generation, innovation, entrepreneurship and much more.

SMEs are classified into three categories based on their investment in plant and machinery or equipment and business turnover.

SME Business Classification

SME IPO meaning

An SME IPO is the first time a small and medium-sized company sells shares to the public. SME IPOs help companies raise capital and get listed. Technically, it is a public capital raising tool where the company reaches a stage where it proves to be capable of growth and wants to raise funds that contribute to a faster growth rate of the SME.

SME IPO is the acronym for Small and Medium Enterprise Initial Public Offering. Raising funds through IPOs helps SMEs to:

• Create wealth for promoters, shareholders, and the public.
• Create demand for the company’s stock.
• Increases the credibility of the company.
• Help in business expansion.
• Establish a long-term foundation.

SME IPO History

SME sector being the second largest employer, after agriculture, required funds to grow further and thus a need for a dedicated exchange/platform for SMEs was felt and in 2012, SEBI launched separate platforms, NSE Emerge and BSE SME, for listing of SMEs. The process for SME IPO takes 3 to 4 months in most cases.

• SME IPO List 2012 (IPO at BSE SME & NSE Emerge)
• The first company to list on the BSE SME IPO platform was BCB Finance .
• The first company to list on the NSE SME IPO platform was Thejo Engineering Ltd .

The issuing company must choose one of the two SME platforms as unlike the mainboard IPO shares, the SME shares are listed on only one exchange.

Objects of the issue for SME IPO

An SME company issues an IPO for various reasons. Some of the key objectives for issuing an IPO include the below:

• To meet working capital needs.
• For growth and expansion.
  • To acquire businesses in similar or complementary fields.
  • To invest in strategic acquisitions/joint ventures.
  • To acquire plant and machinery to meet increased production demand or for better productivity and efficiency.
  • To finance expenses for opening new stores.
• For general corporate purposes.
• To enhance market visibility.
• For repayment of loans (other than promoter or related party loans).
• To provide an exit route for existing investors.
• To reduce debt equity ratio.

The object of the issue tells investors how the company intends to use the funds raised from the public. The issuing company can raise funds through either a fresh issue or a combination of fresh issues and an offer for sale.

1. Fresh IssueFresh issue is the issuance of new shares of the company and their sale to investors. The funds raised are intended for use in the company.
2. Offer for Sale (OFS)Offer for Sale is the sale of shares by an existing promoter or investor. The company does not receive any proceeds from the OFS. All proceeds go to the selling shareholders in the amount of their pro-rata contribution for the offer for sale.

SME IPO Advantages and Disadvantages

SME IPOs in India provide notable benefits like growth potential, easy capital access, enhanced visibility, and better governance. However, they also involve challenges such as costs, market volatility, risk of underperformance, risk of takeovers, and risk of not generating enough demand for the IPO.

Let us have a look at these SME IPO pros and cons in detail.

1. SME IPO Advantages / Benefits of SME IPO

An SME IPO helps companies raise low-cost capital in the capital market. This helps the companies to expand their business and provide adequate capital infusion. This route also creates wealth for the promoters and shareholders of the company. Below are the key SME IPO benefits that also tell about the reasons as to why an SME company should seek an IPO:

1. Raise interest-free capitalSME IPOs help companies raise capital by selling shares to the public. The issuer has to pay the expenses incurred in going public. But, there are no recurring costs or interest payments associated with the funds raised through an IPO.
2. Improved value creationAn IPO increases financial stability and improves the credibility of the company. This leads to:
   • Increased demand for the company’s stock.
   • Higher valuation based on industry and company performance.
   • Creation of shareholder value and wealth.
   • Increase in valuation of a company.
   • Improvement in the company’s overall equity.
   • Creation of leveraged assets with healthier and stronger balance sheets.
3. Expansion and growthAn IPO increases the investor base for the shares of the company. It provides growth opportunities such as expansion through secondary offerings, including private placements.SMEs play an important role in social and economic development. SME growth and expansion increase business and employment opportunities in a country.
4. Facilitating liquidity for shareholdersAn IPO provides liquidity to shareholders and promoters. This results in providing companies with several growth opportunities, such as expansion and mergers and acquisitions.
5. Easy exit optionA capital increase provides existing investors with easy exit options. It also allows new investors to invest in the company. Shareholders and investors in the company can sell their shares and exit through an offer for sale.
6. Lowers the debt burdenRaising funds through an IPO helps reduce the company’s debt by restructuring or paying off the company’s debt.
7. Visibility and image buildingGoing public gives the company greater visibility in the media and helps promote the brand. This improves the credibility of a company over an unlisted company.
8. Employee motivationSME IPOs allow companies to issue stock options to employees, which helps to retain talent and motivate them by aligning their interests with the success of the company.Stock options allow employees to own a portion of the company, which promotes a sense of ownership and engagement. As the company’s share value increases, employees benefit financially, which can increase job satisfaction and loyalty.
9. Better corporate governanceListing usually leads to improved corporate governance and transparency, which can attract more investors and business partners by promoting a more responsible and trustworthy business environment.A listed company must adhere to strict regulatory requirements and disclosure standards to ensure that its financial practices, management decisions, and business operations are transparent and verifiable. Improved corporate governance structures, such as independent boards and audit committees, help to ensure that the company is run in the best interests of its shareholders, further enhancing investor confidence.
10. Easy migration to the main boardSME IPOs help companies grow their business and expand their operations. They also facilitate access or migration to the main board platform for a stable and long-term future and expansion.

SME IPO Disadvantages / Risks

Like all financial instruments, SME IPOs also have some risks. These should also be understood:

1. Costs of the SME IPOThere are costs associated with raising funds through an IPO. Direct costs include merchant banker fees, underwriting commission, market maker fees, registrar fees, legal fees, audit fees, and filing fees. In addition, the company must also spend money on advertising, road shows, and PR (public relations) activities.The costs of an SME IPO vary depending on the size of the IPO, the services used, and the expenses incurred for advertising the IPO. They range from Rs 50 lakhs to a few crores. Read SME IPO costs for more details.
2. Exposure to sensitive dataWhen a company goes public, information about financial details, executives, corporate transactions, violations related to management, and any other important information becomes public.
3. Loss of ValuationWhen listed shares do not perform well on the stock market, the company’s valuation decreases. This affects the reputation of the company and its brands. It also has an impact on the promoters, management and employees.
4. External factors for poor performanceMany challenges can affect the company, such as poor industry performance, poor industry outlook, taxation rules, low industry profitability may lead to poor stock performance.
5. IPO withdrawalOften SME IPOs are withdrawn at the last minute, due to various reasons. These include:
   • Disputes between the company and its house bank,
   • Lack of agreement with the underwriter or other fund managers,
   • Lack of disclosure of key information in the DRHP, etc.
   In this case, the company has to bear the cost of the IPO.
6. Need to hire fund managers to stabilize the price after listingIn a SME IPO, 40% to 70% of small investors sell the shares in the first 2 weeks. This is done to make a quick profit or to book losses and invest the funds in another IPO.The massive selling of these shares leads to sharp fall in prices. Some companies hire fund managers or wealthy investors to buy such shares to stabilize the price. Once the price has stabilized, the fund manager’s responsibility comes to an end.The role of such hired fund managers is very limited which comes at an additional cost. This is beyond the role of the market maker in a SME IPO.
7. Risk of Hostile TakeoversListed companies are more exposed to the risk of a hostile takeover because their shares are publicly traded and can be bought by anyone. This makes it easier for an outside party to acquire a significant portion of the company’s shares and potentially gain control, which can lead to unwanted changes in the company’s management or direction. If a large corporate acquires a majority stake, the independence of the SME company is at risk.

SME IPO vs Mainline IPO

SMEs with a minimum post-issue capital of Rs 1 crore and a maximum capital of Rs 25 crore can apply for an IPO through the SME platform. Mainboard companies are the large companies with paid-up capital of at least Rs 10 crore after the issue.

Although the shares of both, SMEs and mainboard companies, are listed on the proposed exchanges, the listing criteria and procedure for mainboard and SME IPOs are different. The main differences between mainboard IPOs and SME IPOs are described below:

SME IPO limits

We all know that an SME IPO has little relaxed norms compared to a mainboard IPO. However with risks associated with SME IPO, SEBI has rolled out certain restrictions and limitations for SME IPO issuing companies as listed below:

• Restriction on Offer for sale (OFS): The OFS component in an SME IPO should not exceed 20% of the total issue size. Also in case of an OFS, the selling shareholders cannot sell more than 50% of their holding.
• Longer promoter lock-in periods: The lock-in on promoter holding in excess of minimum promoter contribution (MPC) to be released in two tranches: (i) 50% to be released after 1 year (ii) remaining 50% to be released after 2 years,
• Capping on funds to be raised for general corporate purpose: The general corporate amount should not exceed 15% of amount being raised by the issuer or Rs. 10 crores, whichever is lower.
• No repayment of loan from SME IPO proceeds: The SME IPO funds cannot be used for repayment of Loan from Promoter, Promoter Group or any related party, from the issue proceeds, whether directly or indirectly.

Post-Issue Paid-up Capital Restructuring

Company’s paid-up capital is restructured in the pre-IPO phase. SME companies use Bonus Issue or Buyback to bring the post issue paid-up capital between Rs 1 Crore to Rs 25 Crores.

Example of how an SME company reallocates capital to be eligible for SME IPO:

Let’s say an SME Company has:

• Paid-up Capital: Rs 1 Lakh.
• Total Equity Shares: 10,000.
• Face Value (FV): Rs 10.
• Reserves: Rs 10 Cr.
• Net Worth: Rs 10.01 Cr (Rs 10 Cr + Rs 1 Lakh).

To increase paid-up capital:

• Company issue Bonus to promoters of Rs 10.00 Cr / Rs 10 FV = 1 Cr shares.
• Total Promoters holding: 1 Cr + 10,000 = 1.001 Cr shares (100% holding).

SME IPO Public Issue:

• Fresh Issue – Additional shares issued to the public: 33.5 lakhs (reverse calculated as 25% of 1.001 Cr + 33.5 lakhs shares).
• In case of OFS, the shares are deducted from promoters holding.

Post-IPO shareholding:

• Total Share After public issue: 1.001 + 0.335 = 1.336 Cr shares.
• Total Public holding = 33.5 lakhs shares (25%) (Out of this 1.6 lakh shares (5% of public issue) are given to Market Maker).
• Total Promoters holding = 1.001 Cr Shares (75%).

Thus:

Post-Issue Paid Up Capital = Rs 1.336 Cr * Rs 10 FV = Rs 13.36 Cr (which is below Rs 25 Cr).

If the company issues shares at Rs 100 price (Rs 10 FV + Rs 90 Premium), the Rs 90 goes to reserve and surplus.

SME IPO Enquiry

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Key Takeaways

• IPO is an important milestone for small and medium-sized companies as it helps them to raise capital, increase brand awareness, and promote growth.
• SME IPOs were introduced in India in 2012 and have since become an important investment tool.
• For investors, they are a good investment opportunity. This is because SMEs are responsible for at least 60% of the jobs and business created in India.
• SME IPOs have similar advantages and disadvantages as regular IPOs.
• Companies must weigh the benefits against challenges such as market volatility and regulatory hurdles to make informed decisions about going public. Ultimately, a successful SME IPO can lead to long-term success and sustainability in a competitive market.

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Frequently Asked Questions

1. What is an SME IPO?

The process by which small and medium-sized enterprises (SMEs) raise money from the public is known as SME IPO.

Companies with a minimum post-issue capital of Rs 1 crore and a maximum of Rs 25 crore are eligible for SME IPO in India. BSE SME and the NSE Emerge platforms enable SMEs to raise money and get listed on the stock exchange through SME IPO.

Unlike main board IPOs, SME IPOs are small. They are governed by different rules set by regulators and exchanges.

  2. Why should SMEs go public?

The biggest challenge for SMEs is raising capital. Going public allows SMEs to expand their operations while increasing public interest in their services or products.

When SMEs go public, the shareholder’s value also increases.. It also provides investors and companies with additional investment instruments at their disposal.

SMEs can go public to raise funds for a variety of purposes:

• Expanding business operations.
• Pay off debt.
• Making investments.
• Covering current expenses.

Additionally, issuing an IPO also helps SME companies with:

• Improved valuation.
• Wealth Creation for shareholders, promoters, and existing and new investors.
• Enabling the exit of promoters, shareholders or investors.
• Improved brand value and awareness.

3. Are SME IPO good for company and investor?

For SME companies

SMEs may opt for IPO to raise funds and get listed on the stock exchange. If they raise funds through bank loans, they have to pay interest or repayments. SMEs do not have to pay interest when they go public to raise funds. The IPO process increases the visibility of the company’s products and creates a brand image. The IPO roadshow makes the company known to people who are not yet aware of its operations.

The reasons why SMEs should go public are the following:

• They can raise money from the public without paying interest.
• Going public increases the net value of the company.
• Increase the visibility and promote the brand.
• An IPO provides an easy exit opportunity for existing shareholders.
• Helps raise money to expand business operations.
• Empowers the company to become prosperous.
• Provides easy access to the secondary market for equity financing after the IPO.
• To improve the company’s brand awareness, corporate image and brand growth.

For investors

SME IPOs offer retail investors the opportunity to invest money in an SME company. These companies are in the early stages of growth and can offer high returns in the future.

If selected carefully, SME IPO can offer better returns compared to mainboard IPOs on the stock market or other investments.

Once listed on the stock exchange, SME shares are traded in the same way as any other listed shares. The only difference is that SME shares are traded in a minimum lot size of Rs 1 lakh. For example, if an SME share costs Rs 40, you have to buy at least 4000 shares. The share for this company is traded in a lot size of 4000 shares.

4. Why should SMEs raise funds from an IPO?

SMEs can raise money through IPOs and grow their businesses in every way, including:

• Operations, expansion, and acquisitions.
• Conducting day-to-day business operations.
• Repaying debts.
• Purchase of machinery.
• Investment purposes.
• General corporate purpose.

The IPO provides an opportunity for new investors to participate in the IPO, while current shareholders can sell their shares through a tax-efficient exit route.

An IPO has a positive impact on a company’s name recognition, image, and brand expansion.

Information about the company’s product range, management and finances is made available to investors in the offering documents. This increases the level of awareness of the company.

5. SME IPO introduced in which year?

SME IPO was launched in India in 2012.

The NSE Emerge and BSE platforms were launched with the aim of enabling fundraising for SMEs through IPOs.

6. How is SME IPO different?

An SME IPO differs from a conventional IPO in several key respects:

• Lower capital requirements and has less stringent disclosure and compliance requirements compared to a mainboard IPO.
• Listing on separate dedication platforms for SME.
• Relaxed eligibility norms.
• Valuation and pricing in an SME IPO can be more challenging due to the smaller size and shorter operating history of the companies.

7. Can MSME be listed?Yes, MSMEs (micro, small, and medium-sized enterprises) can be listed on the stock market. This is usually an MSME IPO, also known as SME which is meant for smaller companies that do not meet the requirements of the major stock exchanges.

MSMEs can be listed on the BSE SME, the SME platform of the Bombay Stock Exchange (BSE), and NSE Emerge, the SME platform of the National Stock Exchange (NSE).

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About Post Author

Maria Stanly

aware@srvibes.com

http://www.srvibes.com

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