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A Step-by-Step Guide to SME IPO Process in India

December 5, 2024 - By Bhavpreet Singh Soni

ABSTRACT

The Small and Medium Enterprises (SMEs) sector is a cornerstone of India’s economic landscape, playing a crucial role in fostering employment, innovation, and GDP growth. However, many SMEs face challenges in accessing traditional funding avenues due to stringent financial requirements. The SME Initial Public Offering (IPO) process provides a viable alternative, offering businesses an opportunity to raise capital and gain credibility through public listing. This guide simplifies the complex SME IPO process in India, breaking it down step-by-step, from eligibility criteria to post-listing challenges, to help entrepreneurs navigate the process with confidence.

INTRODUCTION

The SME sector plays an indispensable role in India’s economy, contributing to job creation, innovation, and the growth of the GDP. However, despite their significant impact, many small and medium-sized enterprises face difficulties accessing traditional financing options due to high interest rates and stringent requirements. To overcome these barriers, many SMEs are now turning to the public markets for funding, particularly through SME IPOs (Initial Public Offerings). While the process of launching an SME IPO can appear complex due to regulatory intricacies and financial jargon, it can be an incredibly rewarding avenue for growth, expansion, and enhanced market visibility. This step-by-step guide simplifies the entire SME IPO process in India, providing aspiring entrepreneurs with a clear path to navigating the IPO journey. Whether you are an SME owner looking to scale your business or someone interested in learning about the IPO landscape, this guide will help you understand how to successfully approach an SME IPO and the advantages it can bring to your business.

What is an SME IPO?

An SME IPO is a public offering where small and medium-sized enterprises raise funds by selling shares to the public through designated SME platforms. Unlike traditional mainboard IPOs, SME IPOs are tailored to smaller businesses, offering a cost-effective and regulatory-friendly route to public markets.

Key Characteristics of SME IPOs

Eligibility: SMEs with a post-issue paid-up capital of less than ₹25 crore are eligible.
Listing Platforms: SME IPOs list on SME-specific platforms like NSE Emerge and BSE SME, not on the mainboards of stock exchanges.
Investor Base: Typically, SME IPOs are subscribed by retail investors, high-net-worth individuals, and institutional investors.

Benefits of an SME IPO

Access to Growth Capital: Funds raised can be used for expansion, debt reduction, or infrastructure development.
Enhanced Market Credibility: Public listing increases visibility and establishes trust among stakeholders.
Opportunities for Business Scaling: SMEs gain the financial bandwidth to compete with larger enterprises.

Eligibility Criteria for SME IPOs

To ensure that only credible businesses enter the public markets, the Securities and Exchange Board of India (SEBI) has outlined strict eligibility guidelines for SMEs:

Net Tangible Assets:
NSE Emerge: No specific minimum requirement.
BSE SME: Minimum net worth (excluding revaluation reserves) of Rs. 3 crores as per the latest audited financial results.

Net Worth and Profitability:
NSE Emerge: Positive net worth in at least two out of three financial years.
BSE SME: Net worth of minimum Rs. 5 crores with profit before tax of at least Rs. 5 crores in any 2 years out of 3 financial years, or net worth of at least Rs. 25 crores in any 3 years out of 5 financial years.

Post-Issue Paid-Up Capital:
NSE Emerge: Post-issue paid-up capital should not exceed Rs 25 crores.
BSE SME: No specific minimum requirement.

Promoter Shareholding:
NSE Emerge: Minimum Promoter Shareholding: Promoters, individually or jointly, must hold at least 20% of the share capital post-issue.
BSE SME: No Specific Minimum Requirement: There is no strict minimum promoter shareholding requirement on the BSE SME platform. However, it’s generally advisable to maintain a significant stake to demonstrate commitment and long-term interest in the company.

Operational History:
NSE Emerge: The company should have a track record of at least three years.
BSE SME: The applicant company seeking listing should have a track record of operations for at least one full financial year and audited financial results for one full financial year.

Additional Considerations:
Company Registration: The company must be registered under the Companies Act, 2013.
Listing Fees: Both exchanges charge listing fees.
Other Requirements: Both exchanges have additional requirements related to financial statements, disclosures, and corporate governance. Meeting these criteria ensures financial stability and operational credibility, making the SME IPO attractive to investors.

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The Step-by-Step SME IPO Process

Here is a detailed walkthrough of the SME IPO process:

Step 1: Selection of a Merchant Banker

The merchant banker acts as the lead manager for the IPO, overseeing documentation, regulatory filings, and investor engagement.
Choose a banker experienced in SME IPOs, as their role is pivotal in ensuring smooth execution.

Step 2: Filing the DRHP (Draft Red Herring Prospectus)

The DRHP, filed with SEBI and the stock exchange, details the company’s objectives for raising funds, risks, financials, and governance practices.
Post approval, the DRHP is made public, allowing potential investors to review it.

Step 3: Regulatory and Exchange Approval

SEBI and the respective SME platform review the DRHP.
Upon satisfactory evaluation, the stock exchange issues an in-principle approval for listing.

Step 4: Pre-IPO Marketing and Roadshows

The merchant banker organizes investor roadshows to create awareness and generate interest in the IPO.
Engaging presentations and clear communication of business potential are critical at this stage.

Step 5: IPO Subscription and Allocation

Investors place bids during the subscription period, typically 3–5 days.
Based on demand, shares are allocated either on a proportional basis or through oversubscription strategies.

Step 6: Listing and Trading

Market Debut: Once the shares are allotted, they are listed on a recognized stock exchange, typically the BSE SME platform or the NSE Emerge platform.
Trading Commencement: Shares start trading on the stock exchange, allowing investors to buy and sell them.

Costs Involved in the SME IPO Process

A successful IPO requires adequate financial planning. Below is a breakdown of common costs:

Merchant Banker Fees: ~2–5% of the issue size.
SEBI and Exchange Filing Fees: Fixed fees for approvals and compliance.
Marketing and Promotional Costs: Expenses for advertising and investor engagement.
Other Professional Fees: Auditors, legal advisors, and registrars also charge fees for their services.

While costs may seem high, they are investments in achieving long-term growth.

Advantages and Challenges of SME IPOs

Advantages

Access to Long-Term Capital: IPO proceeds provide stable funding compared to short-term loans.
Increased Brand Visibility: A listed status enhances market reputation.
Wealth Creation: Founders and early investors can monetize their stakes.

Challenges

Regulatory Compliance: Regular filings and audits increase administrative burdens.
Market Risks: Volatile market conditions can impact share prices post-listing.
Performance Pressures: Public scrutiny and investor expectations require consistent performance.

Case Studies of Successful SME IPOs in India

KP Green Engineering Limited SME IPO Highlights:

Fundraised: The company raised ₹189.5 crore through its IPO launched from March 15 to March 19, 2024.
Oversubscription: The IPO witnessed strong investor interest, significantly oversubscribed during the offer period.
Type of Business: KP Green Engineering Limited specializes in manufacturing steel structures, a key sector for infrastructure and industrial projects.
Share Price Growth: The stock debuted on the BSE SME platform on March 22, 2024, with listing day returns of approximately 45%. Since listing, the stock has surged around 280% this year, reaching ₹541.95 per share, compared to its issue price of ₹210.
Revenue Growth: The company’s financial performance has been strong, with significant growth in revenue supporting its market valuation and investor confidence.

Sahasra Electronics Solutions Limited SME IPO Highlights:

Fundraised: The IPO raised ₹186.16 crore, making it the second-largest SME IPO of 2024 so far.
Oversubscription: The IPO garnered strong investor demand, achieving significant oversubscription during the offer period (September 26 to 30, 2024).
Type of Business: Sahasra Electronics Solutions Limited is an electronics manufacturing services (EMS) provider, catering to various sectors with advanced electronic solutions.
Share Price Growth: The stock debuted on the NSE SME platform on October 4, 2024, at a 90% premium to its issue price of ₹283 per share.
Revenue Growth: The company’s robust growth in revenue reflects its strong market position and operational efficiency, enhancing investor confidence post-listing.

Ganesh Green Bharat Limited SME IPO Highlights:

Fundraised: The IPO raised ₹125.23 crore through its offer on the NSE SME platform.
Oversubscription: The IPO saw strong demand, resulting in significant oversubscription during the offer period from July 5 to 9, 2024.
Type of Business: Ganesh Green Bharat Limited operates in the green energy sector, focusing on environmentally sustainable solutions.
Share Price Growth: The stock debuted on July 12, 2024, with impressive listing day returns of 109% against the issue price of ₹190. In 2024, the stock has more than doubled, rising over 100% to ₹386.25.
Revenue Growth: The company has demonstrated strong revenue growth, reflecting its increasing market presence and the demand for sustainable energy solutions.

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Conclusion and Key Takeaways

The SME IPO process can be a game-changer for small and medium enterprises, unlocking capital and credibility to compete on a larger stage. While it involves meticulous planning, significant costs, and regulatory adherence, the benefits in terms of growth, brand visibility, and wealth creation far outweigh the challenges.

For SME owners seeking to take their business to the next level, embarking on the IPO journey with the right team and strategy can lead to unparalleled success.