Small and medium-sized enterprises (SMEs) are vital in the Indian economy. Their contribution to the nation’s progress has been significant. However, despite being a crucial growth driver, many SMEs face challenges in accessing capital. To address this issue, Indian stock exchanges, in collaboration with the Securities and Exchange Board of India (SEBI), introduced SME IPOs in 2012. The small and medium enterprise (SME) IPO segment is now sparkling in the IPO industry. In 2024 alone, 236 companies raised a whopping Rs. 8,600 crore, the highest-ever capital inflow in this category.

    The upcoming SME IPO in India in the coming weeks in January 2025 include CapitalNumbers Infotech IPO, GB Logistics IPO, and Rexpro Enterprises IPO.

    Here’s an in-depth look at what these IPOs entail.

    What is an SME IPO?

    An SME IPO refers to the process by which small and medium-sized businesses offer their shares to the public for the first time in exchange for raising funds. These IPOs are typically much smaller than mainboard IPOs. 

    SMEs with a post-issue capital of ₹25 crores or less, but a minimum post-issue capital of ₹1 crore, can issue shares to the public through an SME IPO. These shares are listed on dedicated SME platforms like the Bombay Stock Exchange’s SME platform or the National Stock Exchange’s NSE Emerge platform.

    Where are SME IPOs Listed?

    In India, SMEs seeking to raise funds through IPOs can list their shares on two dedicated platforms:

    BSE SME

    Launched by the Bombay Stock Exchange, this platform allows SMEs to raise equity capital for expansion and growth. It ensures an investor-friendly environment, enabling SMEs to list and trade shares like larger companies on the primary exchange.

    NSE EMERGE

    This National Stock Exchange platform caters to SMEs, helping them gain visibility and credibility while accessing capital markets. It supports their growth through easier access to public funding.

    Both platforms are regulated and tailored to address SMEs’ specific needs. They provide a structured and compliant environment for share trading and help SMEs expand their investor base and scale their operations.

    Advantages of SME IPOs

    Investing in SME IPOs can offer several potential benefits:

    Access to Capital

    An SME IPO can provide a vital channel for equity infusion, which may serve as a direct driver of growth. The funds raised are entirely owned by the company, giving it full autonomy to use them for purposes such as expansion, diversification, acquisitions, or loan repayment—thereby strengthening its balance sheet. Additionally, companies listed through an SME IPO can explore other funding options, such as rights issues, preferential allotments, and qualified institutional placements (QIP). Financial institutions may also prefer lending to entities listed via SME IPOs over unlisted ones.

    Liquidity and Exit Opportunities

    An SME IPO may offer an easy exit route for private equity investors, employees with stock options, and other stakeholders by enabling liquidity. This liquidity can allow shareholders to trade their holdings on the stock exchange, often resulting in better valuations compared to private transactions.

    Improved Governance

    A significant benefit of SME IPOs is the potential for enhanced governance. The process of listing itself ensures companies align with regulatory requirements and governance standards. Post-listing, regular compliance and timely disclosure of material information can become integral, leading to improved governance and better protection of investors’ interests.

    Increased Visibility and Credibility

    Listing through an SME IPO can greatly enhance the visibility of companies that might otherwise lack exposure. A listed status may provide a platform to showcase strengths, compete with peers, and create business opportunities. Public listing may also attract media coverage and increase public awareness, thereby improving the company’s credibility.

    Transition to the Main Board

    A unique advantage of an SME IPO is the seamless migration it can enable to the main board, such as the BSE or NSE. Companies with a paid-up capital between ₹10 crore and ₹25 crore may easily transition to these platforms, unlocking further growth opportunities.

    Difference Between SME IPO and Mainboard IPO

    IPOs are broadly classified into two categories: Mainboard IPOs and SME IPOs. While both serve the purpose of raising funds, they differ significantly in terms of requirements and features. Here’s a brief comparison:

    Basis of DifferenceMain Board IPOSME IPO
    IPO Offer DocumentsThe Draft Red Herring Prospectus (DRHP) for Mainboard IPOs is submitted to SEBI for review and approval.The DRHP and prospectus for SME IPOs are reviewed and observed by the stock exchange; SEBI approval is not required.
    IPO TimeframeMainboard IPOs usually require around six months or longer to become public.SME IPOs typically take 3 to 4 months to go public.
    IPO UnderwritingIPOs distributing 50% of shares to qualified institutional buyers (QIBs) do not require underwriting.SME IPOs must be fully underwritten, with 15% of the underwriting obligation met from the merchant banker’s account.
    Issue Eligibility NormsSEBI has stringent and detailed norms for eligibility and issuing guidelines for Mainboard IPOs.The eligibility norms for SME IPOs are more relaxed, with specific conditions to simplify regulatory requirements.
    Listing ExchangeShares from Mainboard IPOs are listed on the BSE and NSE platforms.SME IPO shares are listed on either the BSE SME or NSE Emerge exchanges.
    Market MakingMarket making is not mandated for Mainboard IPOs after the issue is completed.Market making is compulsory for SME IPOs to maintain liquidity.
    Minimum Application or Trading Lot SizeThe minimum application or trading lot size for Mainboard IPOs is generally between ₹10,000 and ₹15,000.SME IPOs have a higher minimum application size, starting at ₹100,000.
    Number of AllotteesA Mainboard IPO requires at least 1,000 subscribers or allottees.For an SME IPO, the minimum number of allottees required is just 50.
    Post-Issue Paid-Up CapitalCompanies aiming for listing on BSE and NSE must have a post-issue paid-up capital of at least ₹10 crore.SME companies need a post-issue paid-up capital of ₹1 crore, with a maximum cap of ₹25 crore.
    ReportingCompanies issuing Mainboard IPOs must conduct audits of their financial statements every three months.SME companies are required to audit their financial statements every six months.

    Conclusion

    SME IPOs bring a host of advantages, not just for the businesses but also for investors. They provide small and medium enterprises with a platform to raise funds, improve credibility, and expand their operations. For investors, SME IPOs may offer a chance to invest early in promising businesses with significant growth potential.

    As more SMEs tap into the IPO route, this trend reflects the growing confidence in their ability to thrive in competitive markets. Keeping an eye on upcoming IPOs could help you identify opportunities to support emerging businesses while potentially earning substantial returns. The steady rise of SME IPOs signals a bright future for both enterprises and investors seeking growth opportunities in this space.

    You can Open demat account and invest in IPOs with HDFC SKY. Begin today and take a step towards building a brighter financial future.

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