An SME IPO (Initial Public Offering) is a process through which Small and Medium Enterprises (SMEs) raise capital by offering shares to the public. It allows SMEs to get listed on a dedicated SME platform of stock exchanges such as BSE SME or NSE Emerge, providing them with a platform to access public funds.
Frequently Asked Questions(FAQs) About SME IPO in India
General Questions
- Capital for Expansion: Raising funds to finance growth initiatives such as new projects, acquisitions, and expansion into new markets.
- Improved Visibility and Credibility: Being a listed entity increases the company’s visibility, credibility, and brand value.
- Talent Attraction and Retention: Offering stock options to employees can attract and retain top talent.
- Exit Strategy: Provides an exit route for early investors, enhancing liquidity.
Eligibility and Requirements
- Operational History: The company should have been operational for a minimum of three years.
- Net Tangible Assets: Should have minimum net tangible assets of ₹1 crore.
- Net Worth: Should have a minimum net worth of ₹1 crore.
- Profitability Track Record: Should have a positive net worth and distributable profits in at least two out of the immediately preceding three financial years.
- Post-Issue Paid-Up Capital: The post-issue paid-up capital of the company should be less than ₹25 crore.
- Merchant Banker: The company must appoint a merchant banker to underwrite the issue.
- Minimum Application Size: Should be ₹1 lakh per application.
- Company Website: The company must have an operational website.
- Underwriting: The issue must be 100% underwritten, with the merchant banker underwriting 15% of the issue.
- Minimum Investors: There must be a minimum of 50 investors participating in the IPO.
Process and Documentation
- Appoint Advisors: Hire a merchant banker and other advisors such as legal and financial advisors.
- Due Diligence and Documentation: Conduct thorough due diligence and prepare necessary documents, including the Draft Red Herring Prospectus (DRHP).
- Filing with SEBI and Exchange: File the DRHP with the Securities and Exchange Board of India (SEBI) and the relevant stock exchange.
- SEBI and Exchange Review: Address queries and observations from SEBI and the exchange.
- Marketing and Roadshows: Conduct marketing campaigns and roadshows to attract potential investors.
- Pricing and Allotment: Determine the issue price and allot shares to investors.
- Listing: Get the shares listed on the SME platform of the stock exchange.
- Draft Red Herring Prospectus (DRHP)
- Financial Statements: Audited financial statements for the last three years.
- Due Diligence Report: Conducted by the merchant banker.
- Legal Compliance Certificate: From legal advisors ensuring compliance with regulatory requirements.
- Underwriting Agreement: Agreement with the merchant banker for underwriting the issue.
- Marketing and Advertising Materials: For investor awareness and promotion.
Post-IPO Requirements
- Quarterly and Annual Reports: Regular filing of quarterly and annual financial reports with the stock exchange.
- Corporate Governance: Adherence to corporate governance norms as prescribed by SEBI and the stock exchange.
- Disclosure of Material Events: Timely disclosure of material events and information to the stock exchange.
- Maintaining Public Shareholding: Ensuring that a minimum level of public shareholding is maintained as per regulatory norms.
Financial and Operational Considerations
Costs include fees for the merchant banker, legal advisors, auditors, marketing expenses, and regulatory filing fees. The total cost can range between 7-10% of the funds raised through the IPO.
Issuing new shares dilutes existing ownership. Public disclosure and compliance requirements increase, and the company must answer to public shareholders, which may influence decision-making processes.
Risks and Challenges
- Market Volatility: Share prices can be affected by market conditions.
- Regulatory Scrutiny: Increased regulatory scrutiny and compliance requirements.
- Performance Pressure: Pressure to meet quarterly performance expectations.
- Dilution of Control: Potential dilution of control for existing owners and management.
Benefits
- Access to Capital: Provides funds for growth and expansion.
- Enhanced Credibility: Increases the company’s credibility and public profile.
- Liquidity for Shareholders: Offers liquidity to shareholders through the secondary market.
- Attracting Talent: Ability to attract and retain employees through stock options.