LIC Ltd. and Delhivery are two examples of large, well-known companies with a significant market share that have lately gone public. However, did this lead you to believe that the only businesses qualified to seek capital through an IPO are large, market-leading corporations? But that is untrue. Herein lies the value of SME’s first product.
This article will explain what an SME’s initial public offering (IPO) is, how it operates, and how it differs from a typical IPO.
India currently has a start-up “culture,” with new businesses sprouting up since the Indian government encouraged Indian entrepreneurs to take off. If you want to buy their stock, they are worth looking at, as they could develop into interesting business opportunities in the future. These firms typically offer their formerly privately held stock to the public once they show potential for continued growth and development. After that, the stock exchange lists its shares for public trade. IPOs, or initial public offerings, are when businesses take this action and make stock available to the general public. IPOs are typically offered by big businesses that have experienced significant expansion. SMEs, or small and medium-sized enterprises, may also provide an SME IPO, nevertheless.
What is an SME IPO?
The procedure by which small and medium-sized businesses go public and raise money from the general public is known as an SME IPO. Larger corporations typically use mainstream IPOs to sell their shares to the public.
In this case, an enterprise’s shares are listed on an alternative platform rather than the one used for the mainline IPO. Retail and institutional investors are permitted to participate in them, just like in the mainline IPO; however, there are certain special distinctions that we’ll go over later.
What are the characteristic features of an SME IPO?
The features of an SME IPO are listed below:
- The business needs to have a fully paid-up capital of Rs 3 crore. Both the net worth and the tangible assets ought to follow the same rules.
- In order to conduct an initial public offering (IPO), SMEs are required by the Companies Act of 2013 to demonstrate profitability for two of the preceding three fiscal years. It is important to remember that profitability in this instance does not refer to additional revenue. Businesses that are unable to demonstrate profitability may not be allowed to go public.
- The minimum trading lot for SME IPOs varies from 100 to 10,000, contingent on the price range, as per SEBI standards. These are periodically evaluated and updated based on how the price has changed since the listing.
How does an SME IPO get listed?
SEBI has authorized a set of regulations for SME IPO listings. The following are prerequisites that SMEs must meet to finish the listing process.
The following outlines the procedure for listing a SME IPO:
- Appointing a merchant banker: Small and medium-sized businesses must also appoint a merchant banker. To assist with the listing process, SMEs require the guidance of an SME IPO expert.
- Compliance and Regulatory Process: Making sure all information, financial facts, and accounts accurately represent the company’s reality is the next step. It verifies that there are no data inconsistencies that could affect the company’s reputation
- Filing Red Herring prospectus: SMEs are required to file a red herring draft prospectus, just like in a traditional IPO. It includes in-depth details about the business’s activities and prospects. Future investors can use the RHP as a guide.
- Verification: In order to ensure there are no risks of errors or inconsistencies, all information and data provided during the prospectus filing are triple-checked. This is also the stage for site verification.
- An-principle approval: An-principle consent is granted to the SME, contingent on meeting certain requirements. Before making the offer public, the corporation must meet all requirements.
- Opening the issue: Following the completion of due diligence and permission, investors can begin bidding on the offer. Before it closes, the public offer will be available for a few more days.
- Listing and trading of shares: The process of getting listed on the exchanges takes roughly a week to finish. Investors can begin trading scrips on the secondary market after they are allocated and listed.
- The lengthy and paper-heavy procedure starts with selecting a merchant banker and ends with listing IPO shares. Knowing how the IPO share listing process operates is beneficial to you as an investor. Based on an early assessment of market trends and investor interest, the lot size and issuance price are determined. The equities trade like ordinary shares after listing, with their value fluctuating according to market demand.
How to invest in an SME IPO?
Are you planning to invest in an IPO soon? If so, you need to keep up with the SME IPO application procedure. Here is a detailed guide on how to apply for SME IPOs in India:
- Through research: Investing in an SME IPO requires thorough investigation and planning. An SME may lack solid principles, as was previously mentioned. SME IPOs carry greater risk than mainstream IPOs. The same justification applies to why research and analysis are crucial to an SME IPO. Try to gather as much information as you can, even though the SME was formerly a private business. For more details, consult the concerned SME’s Red Herring Prospectus (RHP).
- Creating a demat and a trading account: In order to be eligible for a SME IPO, you must have a Demat cum trading account. Trading SME shares requires a trading account. You may choose to trade the shares you received in a SME initial public offering (IPO) on the stock exchange. This is the point at which a trading account is necessary. In contrast, holding shares acquired through an SME IPO necessitates a Demat account.
- Submission of the IPO application: In order to file an application for a SME IPO, you must have a trading account. Additionally, submit the SME IPO application on the stock exchange’s specialized platform, such as NSE Emerge or BSE SME. Applications for SME IPOs from investors must be submitted within the subscription period. Once the subscription period has ended, your IPO application will not be approved. Moreover, fill out the SME IPO application with the correct information.
- Waiting to allotment: Investors must hold off until the issuer begins the allocation procedure. The IPO subscription period ends, and the allotment procedure starts. The issuer transfers electronic shares straight to your Demat or Dematerialization account when you choose this option.
What is the reason behind going public?
As everyone knows, small companies form the foundation of the economy. These can significantly raise an economy’s GDP if they have sufficient backing. It’s a common realization, though, that small businesses typically have trouble obtaining financing.
In order to help small and medium-sized businesses obtain capital more easily, SEBI introduced the idea of the SME IPO, which offers them several exemptions. Businesses that want to join the capital markets and trade on platforms like NSE EMERGE and BSE SME but do not have significant profitability or net worth are the ones receiving special attention.
SEBI is set to grant leniency to start-ups to list on the Small and Medium Enterprises (SME) platform, aiming to provide more opportunities for smaller companies that cannot list on the main board. This move is driven by the need for capital for growth, as many start-ups lack the resources to list on the main board. A platform designed for small companies would benefit both the companies and investors. As companies listed on SME platforms become more influential, they attract more investors and the increasing number of SME stocks and returns further attracts investors. This support from the exchange board and investors could lead to a favourable Indian market for SME-IPOs, which are crucial for the nation’s growth and employment opportunities.
You can receive many returns on your shares if the SME grows into a huge corporation in the ensuing years. Before choosing an option, investors need to be aware of the distinctions between SME and mainline IPOs. Mainline and SME IPOs have distinct application sizes, minimum allotted counts, reporting obligations, and other aspects. To find forthcoming SME IPOs and timely submit applications, you can rely on a trading platform.
[Please Note: Investments in the securities market are subject to market risks; read all the related documents carefully before investing.]