Discover the definition, eligibility requirements, and benefits of SME IPOs to help your small or medium-sized business successfully navigate the public offering process.

What is an SME IPO?

An Initial Public Offering (IPO) is a process through which a private company offers its shares to the public for the first time, transitioning into a publicly traded entity. For Small and Medium Enterprises (SMEs), an IPO serves as a strategic avenue to raise capital, enhance market visibility, and fuel growth initiatives.

Key Differences Between SME IPOs and Mainboard IPOs

• Capital Requirement: SMEs must ensure that their post-issue paid-up capital does not exceed ₹25 crore, whereas mainboard IPOs typically require a minimum of ₹10 crore.
• Underwriting: SME IPOs mandate a 100% underwriting, ensuring the entire issue is guaranteed, unlike mainboard IPOs where underwriting is optional.
• Regulatory Oversight: SME IPOs are reviewed by stock exchanges, whereas mainboard IPOs undergo scrutiny by SEBI.
• Investor Base: SMEs need at least 50 investors, compared to 1,000 investors required for mainboard IPOs.

Eligibility Criteria for SME IPOs

To embark on an IPO journey, SMEs must meet specific requirements set by regulatory bodies:

• Incorporation: The company must be registered under the Companies Act of 1956.
• Capital Cap: Post-issue paid-up capital should not exceed ₹25 crore.
• Net Tangible Assets: SMEs must possess net tangible assets worth at least ₹1.5 crore.
• Operational Track Record: A minimum of three years of operational history is required. For entities previously operating as proprietorships or partnerships, the combined track record must also be at least three years.
• Profitability: The company should demonstrate operating profit or positive EBITDA in two of the last three financial years.
• Promoter Stability: No changes in the promoters are allowed for a year post-IPO filing.
• Regulatory Compliance: Promoters must adhere to regulatory and disciplinary standards, avoiding any disqualifications or suspensions by stock exchanges.

The IPO Process for SMEs

Navigating an SME IPO involves several critical steps:

1. Selecting an Underwriter

Engage a merchant bank with expertise in IPO processes. The underwriter assists in drafting IPO-related documents and determining the share price.

2. Creating the DRHP

The Draft Red Herring Prospectus (DRHP) is essential, containing comprehensive details about the issue. It outlines the company’s objectives, fund utilization, and key business metrics, submitted to SEBI for approval.

3. Advertising the IPO

Effective marketing is crucial to attract potential investors. This includes announcing the IPO’s opening and closing dates, along with the price band.

4. Allotting and Listing Shares

Post subscription, shares are allotted to eligible investors. Subsequently, the company’s shares are listed on stock exchanges, marking its transition to a publicly traded entity.

Advantages of SME IPOs

Launching an IPO offers multiple benefits for SMEs and their stakeholders:

• Capital Infusion: Raises substantial funds to support growth, expansion, and operational needs.
• Enhanced Visibility: Public listing increases market presence and credibility.
• Investor Diversification: Attracts a broader investor base, allowing for diversified investment portfolios.
• Growth Potential: Access to capital markets provides opportunities for scaling operations and exploring new ventures.

Benefits for Investors

• Early-Stage Entry: Investors can engage with the company at a nascent stage, potentially reaping long-term rewards.
• Portfolio Diversification: SME IPOs allow investors to diversify across various industries and sectors.
• High Return Potential: SMEs often exhibit significant growth prospects, offering the possibility of substantial returns.

Considerations Before Pursuing an SME IPO

While SME IPOs present lucrative opportunities, certain challenges must be addressed:

• Higher Risk: Smaller companies may lack extensive operational and financial histories, making future performance predictions challenging.
• Liquidity Concerns: Shares of SMEs might experience lower trading volumes, complicating buying or selling activities.
• Investment Analysis: Selecting the right SME IPO requires thorough analysis and due diligence, which can be time-consuming.

How TriC Global Can Assist Your SME IPO Journey

Navigating the complexities of an SME IPO can be daunting. TriC Global offers specialized IPO as a Service, providing expert guidance from IPO preparation to post-listing compliance. Our Global Partnership Network (GPN) connects SMEs with essential resources and strategic partners worldwide, ensuring a seamless transition to the public markets.

Ready to elevate your business? Partner with TriC Global today!