What is SME IPO in India? Comprehensive Guide

What is SME IPO in India?

Small and Medium Enterprises (SMEs) play a crucial role in the Indian economy, contributing significantly by employing over 40% of the country’s workforce and accounting for approximately 45% of the manufacturing output as of December 2014.

However, SMEs in India face several challenges, including low scale and limited adoption of technology, resulting in poor productivity. The primary obstacle they encounter is access to financing, which often leads to SMEs going out of business.

To address this issue, stock exchanges in India have introduced separate platforms designed to assist SMEs in raising funds from investors in the stock market. The Bombay Stock Exchange (BSE), the country’s oldest stock exchange, provides the ‘BSE SME’ platform, while the National Stock Exchange (NSE), India’s largest stock exchange, offers the ‘EMERGE’ platform for SMEs.

To get their stocks listed and traded on these exchanges, SMEs are required to conduct an Initial Public Offering (IPO) on the respective SME platforms. An IPO is a popular method for companies to raise capital from investors and become listed on stock exchanges.

History of SME Platform or SME IPO in India

In the mid-1990s, the Over The Counter Exchange of India, commonly known as OTCEI, was established. Unfortunately, OTCEI did not receive the necessary support and faced premature closure. The concept was ahead of its time, and it struggled to gain traction.

However, in January 2010, the Prime Minister’s Task Force recommended the creation of a dedicated stock exchange or platform specifically designed for Small and Medium Enterprises (SMEs). Subsequently, the Securities and Exchange Board of India (SEBI) introduced regulations to govern the SME platform. In response to this initiative, both the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE) established platforms named BSE SME Platform and EMERGE, respectively. These stock exchanges have been actively working to make their respective SME platforms conducive for companies to grow from small to large by raising funds from the capital market.

The new SME platforms introduced screen-based trading, marking a departure from the earlier OTC (Over The Counter) system. BSE was the pioneer in launching its SME platform in India in 2012, and by December 2015, it had listed around 120 securities. NSE followed suit with its own SME platform, although it had a smaller number of listings, approximately a dozen.

SME IPOs have shown promise by delivering better returns for companies post-listing. Some firms have even used the SME platform as a stepping stone to eventually migrate to the mainboard of the stock exchange. As a result, this segment has garnered interest and attention across various stakeholders in the Indian financial markets.

What are the requirements to list on SME exchange?

Requirements for Listing on BSE SME

Criteria	Requirement
Incorporation	Company must be incorporated under the Companies Act, 1956 or 2013.
Post Issue Paid-up Capital	Not more than Rs. 25 crores post-issue paid-up capital.
Net Worth	Positive net worth.
Tangible Asset	Net tangible assets should be Rs. 1.5 crore.
Track Record
– Combined track record	At least 3 years.
OR
– In case of less than 3 years of operation	Funded by banks, financial institutions, government, or listed group company for at least 2 years.
– Positive cash accruals	In any of the last 3 years with positive net worth.
Other Requirements
– Company website	Mandatory.
– Demat securities agreement	Required with depositories.
– Promoter stability	No change in promoters in the preceding year.
Disclosures
– BIFR status	Not referred to BIFR, or if out of BIFR, it’s allowed.
– Winding up petition	No winding up petition admitted by the court.

Requirements for Listing on NSE Emerge

Criteria	Requirement
Incorporation	Company incorporated under the Companies Act 1956/2013 in India.
Post Issue Paid-up Capital	Not more than Rs. 25 crore post-issue paid-up capital.
Track Record
– Track record period	At least 3 years for the applicant, promoters, or converted firms.
– Positive cash accruals	At least 2 out of 3 preceding financial years with positive net worth.
Other Listing Conditions
– BIFR or Insolvency Code	Not referred to BIFR, no proceedings under the Insolvency and Bankruptcy Code.
– Winding up petition	No winding up petition admitted by NCLT/Court.
– Regulatory Actions	No material regulatory or disciplinary actions in the past 3 years.
Disclosures
– Regulatory or Disciplinary Actions	Disclose any such actions in the past year.
– Defaults in Payments	Defaults in payment of interest/principal during past 3 years.
– Litigation Record	Litigation details, nature, and status.
– Director’s Criminal Cases	Status of criminal cases against directors and their impact.

WHY GET LISTED ON SME PLATFORM?

The creation of SME Exchanges addresses a significant challenge faced by Small and Medium-Sized Enterprises (SMEs) in accessing equity capital from public sources. Here are the benefits of listing on SME Exchanges for various market participants:

Benefits for SMEs:

1. Access to Equity Capital: SMEs gain access to equity capital, which is a direct driver of growth for their businesses. This capital infusion can support expansion, research, development, and other growth initiatives.
2. Unlocking Enterprise Value: Listing on an SME Exchange allows SMEs to unlock the inherent value of their enterprises. It provides an avenue for investors to realize the value of their investments.
3. Good Governance Practices: SME Exchanges stipulate and regulate good governance practices, ensuring that listed companies adhere to standards that enhance transparency, accountability, and ethical conduct.
4. Enhanced Visibility: Listing enhances the visibility of SMEs in the market, making them more visible to potential investors, clients, and partners.
5. Credibility: Being listed on an SME Exchange enhances the credibility of SMEs among stakeholders, including shareholders, clients, employees, and government authorities.
6. Cost-Effective Access: SMEs can access the capital market in a cost-effective manner, avoiding some of the high expenses associated with mainboard listings.
7. Promoter Ownership: Listing on an SME Exchange allows SMEs to raise capital without diluting the ownership of existing promoters below 75%, providing them with more control.
8. Efficiency: The time required to execute an IPO on an SME Exchange is generally shorter compared to raising funds on the mainboard.
9. Future Fundraising: Once listed, SMEs have continued access to the capital market, making it easier to raise additional funds for expansion or other purposes.
10. Currency for Transactions: The listed shares of an SME can be used as a currency for business acquisition transactions, facilitating growth through mergers and acquisitions.
11. Migration to Main Board: SMEs have the advantage of seamlessly migrating to the mainboard when they grow larger and meet the requirements of the larger exchange.

Benefits for Promoters, Investors, and Employees:

1. Investment Opportunity: SME Exchanges provide investors with the opportunity to invest in organized yet small and growing enterprises at an early stage of their business lifecycle, potentially offering higher returns.
2. Liquidity: Listing on SME Exchanges provides liquidity to existing equity investors and promoters, allowing them to sell their shares and realize their investments.
3. Fair Value Establishment: Shares of listed companies on SME Exchanges are actively traded, enabling the establishment of fair or near-fair market values for these shares.
4. Employee Participation: Employees of listed SMEs can participate in the growth and profits of the company by becoming shareholders, aligning their interests with the company’s success.
5. Tax Efficiency: Investing in a listed company is often tax-efficient compared to unlisted companies. Short-term capital gains tax on the sale of listed securities is typically 15%, and long-term capital gains tax is usually 10%, providing favorable tax treatment for investors.

What is the listing fee on SME platform?

Listing Fee Component	Amount (₹)
Processing Fees	25,000
Initial Listing Fees	25,000
Annual Listing Fees (Based on Paid-Up Capital)
Up to ₹5 Crore	10,000
Above ₹5 Crore and up to ₹10 Crores	15,000
Above ₹10 Crore and up to ₹20 Crores	25,000
Above ₹20 Crore and up to ₹25 Crores	45,000

Is suspended companies are allowed to list on SME Exchange?

Suspended companies are typically not allowed to list on SME Exchanges unless the suspension on their scrips (shares) is revoked, and they are permitted to resume trading on the Main Board of the exchange.

What are the major features of SME Exchange?

1. Participation by SEBI Registered Members: All existing SEBI registered members of the Main Board exchanges are allowed to participate on the SME Exchanges. This means that authorized brokers and intermediaries can engage in trading activities on behalf of clients on the SME Exchange.
2. Settlement Mechanism: The settlement mechanism on SME Exchanges typically follows a T+2 (Transaction Date plus 2 business days) settlement cycle, which is the same as that applicable to the Main Board of the exchange. This means that trades executed on the SME Exchange are settled within two business days after the transaction date.
3. Market Makers: SME Exchanges may have market makers who provide liquidity to the market by quoting buy and sell prices for certain securities. Market makers play a crucial role in ensuring that there is sufficient trading activity and liquidity for the listed SMEs.
4. Trading System: The trading system of SME Exchanges is often based on established technology platforms. For example, the information you provided mentions that the trading system of the SME Exchange is based on the BSE Online Trading System (BOLT). This system facilitates the execution of trades, order matching, and overall trading operations on the SME Exchange.

Can retail investors apply in SME IPOs?

Indeed, similar to Mainline IPOs, SME IPOs often have a portion reserved specifically for retail investors. This reservation ensures that small investors have the opportunity to participate in the IPO and potentially benefit from the company’s growth.

It’s important to note that while retail investors can participate in SME IPOs, the minimum investment amount for SME IPOs is often higher compared to Mainline IPOs. As you mentioned, it typically exceeds Rs 1,00,000, which means that retail investors need to invest a substantial amount of capital to participate in these offerings.

How to check bidding detail for SME IPO’s?

Exchange	BSE SME Exchange	NSE Emerge Exchange
Step 1	Go to BSESME.com	Go to nseindia.com/emerge
Step 2	Click on Public Issues	Click on Initial Public Offering (IPO)
Step 3	Click on the specific IPO name	Click on View under ‘Bid Details-NSE’ column
Step 4	Click on the ‘BSE Bid Detail‘ button

What is the minimum lot to apply for SME IPOs for retail and HNI categories?

Examples of sme  IPO Market Lot

Application Type	Lot Size	Number of Shares	Application Amount
Retail Minimum	1 lot	2000 shares	₹140,000
Retail Maximum	1 lot	2000 shares	₹140,000
S-HNI Minimum	2 lots	4000 shares	₹280,000

Can we invest in SME IPO through ASBA ?

Yes, both mainline and SME IPO applications can be submitted online via the ASBA service.

How to Apply for SME IPOs?

Indeed, applying for an SME IPO can be done both offline and online, with certain prerequisites such as having a Demat (Dematerialized) account and a bank account. Here’s how you can apply for an SME IPO using both methods:

Offline Application:

1. Obtain the ASBA (Application Supported by Blocked Amount) application form for the specific SME IPO. These forms are typically available at various locations, including banks, brokers, and lead managers.
2. Fill out the ASBA application form with the necessary details. You will need to provide information like your name, address, Demat account number, bank account details, and the number of shares you wish to apply for.
3. Submit the completed application form along with the required application money to the designated bank branch. The application amount is usually blocked in your bank account at this stage.
4. Once the IPO allotment is complete, shares will be credited to your Demat account if you are allotted shares. If you are not allotted any shares, a refund will be issued through a check, which will be sent to your registered address.

Online Application:

1. To apply for an SME IPO online, you need to have a trading account with a broker. Ensure that your trading account is linked to your bank account.
2. Log in to the broker’s website or trading platform using your trading account credentials.
3. Navigate to the section for IPO applications or SME IPOs, and select the specific SME IPO you want to apply for.
4. Fill in the required details in the online application form. This typically includes your Demat account information, the number of shares you want to apply for, and your bank account details.
5. Confirm your application, and the application amount will be blocked in the bank account linked to your trading account. The amount will only be debited if you are allotted shares.
6. After the IPO allotment process is completed, if you are allotted shares, they will be credited to your Demat account.

Applying for SME IPOs online is generally more convenient and faster, as it eliminates the need for physical paperwork and allows for quicker processing of applications. Additionally, it provides real-time updates on allotments and allows you to track the status of your application online.

How SME shares can be sold or purchase?

You are absolutely correct; SME shares can be traded on stock exchanges through your stock broker in a similar manner to how mainboard shares are traded. However, there are a few notable differences, as you mentioned:

1. Exchange Specific: SME shares can only be traded on the exchanges where they are listed. For instance, SME shares listed on the BSE SME platform can only be traded on the BSE, and those listed on the NSE Emerge platform can only be traded on the NSE.
2. Lot Size: One of the significant differences is the lot size. While mainboard shares can often be traded in any quantity (e.g., 1 share), SME shares are traded in specific lot sizes. For example, a lot size for an SME share might be 2000 shares, meaning that you can only buy or sell in multiples of 2000 shares in one order. This lot size requirement can differ from one SME share to another and is set by the respective exchange.

These differences reflect the unique trading characteristics of SME shares, which are designed to accommodate the needs and trading dynamics of small and medium-sized enterprises while still allowing investors to participate in these markets.

Differences between Main Board IPO and SME IPO

Basis of Difference	Main Board IPO	SME IPO
Issue Eligibility Norms	Stringent and complex eligibility norms and guidelines set by SEBI for Main Board IPOs.	Relaxed eligibility norms with specific conditions for SME IPOs.
Post-Issue Paid-up Capital	Minimum post-issue paid-up capital of Rs 10 crore (face value) required for Main Board IPOs.	Minimum post-issue paid-up capital of Rs 1 crore and maximum of Rs 25 crore for SME IPOs.
Number of Allottees	Minimum of 1,000 subscribers or allottees required for Main Board IPOs.	Minimum of 50 allottees required for SME IPOs.
Minimum Application/Trading Lot Size	Main Board IPOs have a minimum application value or trading lot of Rs. 10,000 to Rs. 15,000.	SME IPOs typically have a much higher minimum application size, often exceeding Rs. 100,000.
IPO Underwriting	Underwriting is non-mandatory for Main Board IPOs, subject to 50% allocation to Qualified Institutional Bidders (QIBs).	SME IPOs must be 100% underwritten, with 15% underwriting from the merchant banker’s account.
IPO Offer Documents	The IPO offer document, Draft Red Herring Prospectus (DRHP), is submitted to SEBI for vetting.	DRHP and Prospectus are reviewed by the stock exchange itself, and SEBI observation is not required for SME IPOs.
IPO Timeframe	Main Board IPOs typically take about 6 months or more to complete the public offer process.	SME IPOs have a shorter timeframe, usually taking 3 to 4 months to issue to the public.
Market Making	Post-issue market making is generally not required for Main Board IPOs.	Market making is mandatory for SME IPOs to provide liquidity in the secondary market.
Reporting	IPO issuers on the Main Board have to audit their quarterly financial statements.	SME companies must audit their half-yearly financial statements.