What is SME IPO?

Have you ever wondered how small brands, startups, and local businesses become big, national brands? Imagine a young startup which you are following since it started and the owner wants to open more stores across the country? To do this, they require a lot of funds.

One way to get this money is by inviting people like you to invest in their company. In return, you become a small owner of the business. When a small or medium-sized company does this for the first time, it’s called an SME IPO.

This is the most efficient way for the growing Indian businesses as the IPO helps them in expanding their business, create more jobs, and become a huge business in the future. In this blog we will look at what an SME IPO is and how it works, in simple terms.

What is an IPO?

IPO which is known as Initial Public Offering, think of it as a private company which has a big pizza owned by few members, for initial days of the business the pizza is owned by limited members but now they want to increase their operations and require funds to expand their business, so they decide to cut their pizza into thousands of tiny slices (called ‘shares’) and sell them to the general public for the very first time, this is an IPO.When you invest in these tiny slice, you pay the company, and the company uses this money for business expansion and in return, you become a part-owner of the company. If the company does well and the value of the share also goes up. This whole process of a company selling its shares to the public for the first time is called “going public”.

Read Also: Top 10 Largest IPOs in India

Understanding the “SME” in SME IPO

“SME” stands for Small and Medium Enterprises, these are businesses that you might witness around, they are not big giants like TATA or Reliance but these businesses come as a backbone of the Indian economy as they create jobs and offer different products and services. 

The Indian government has a clear definition for what counts as a Micro, Small, or Medium enterprise. It’s based on two simple numbers:

• Investment: The amount of money that the company has invested in its machinery and equipment.
• Turnover: This is the money that the company has earned from the sales of its products and services each year.

Let,s look at a table to understand exactly what are SME IPOs are:

Enterprise Type	Investment in Plant & Machinery	Annual Turnover
Micro	Up to Rs.2.5 crore	Up to Rs.10 crore
Small	Up to Rs.25 crore	Up to Rs.100 crore
Medium	Up to Rs.125 crore	Up to Rs.500 crore

What is an SME IPO?

An SME IPO is a special method in which these small and medium companies raise money from the public and get their shares listed on the stock exchange. 

You might think, if these businesses are small how is it possible for them to enter the complicated process of a regular IPO. The Indian stock stock exchanges, the BSE and the NSE, have created special platforms just for these smaller companies. These platforms are called BSE SME and NSE Emerge where small and medium enterprises can list their stocks and bring their IPO for the general public.

These platforms have simpler rules and lower costs, making it much easier for smaller companies to get listed. Here’s a quick comparison of an SME IPO and a regular (Mainboard) IPO.

Feature	SME IPO	Mainboard IPO
Who can issue?	Small & Medium Enterprises (SMEs)	Large established companies
Post issued paid-up Capital	Up to Rs.25 Crores	Minimum Rs.10 Crores
Minimum Investment Required	Typically above Rs.1 Lakh	Typically Rs.10,000 – Rs.15,000
Regulating Authority	The Stock Exchanges (BSE/NSE)	SEBI (Securities and Exchange Board of India)
Minimum Number of Investors	50	1,000
Financial Reporting	Half-yearly	Quarterly
Underwriting	100% Mandatory	Optional

Read Also: Best Apps for IPO Investment in India

How Does an SME Get Listed? 

The listing process of an SME IPO might feel very complex but it is just a step by step process. From the decision to go public to the final listing day, it usually takes about 4 to 6 months.

1. The Merchant Banker

This is the first step to get the IPO listed, here company’s hire an expert known as Merchant Banker, this is an investment bank which manages the entire IPO process, from paperwork to pricing and these bankers also make sure that all the rules are being followed.  

2. The Offer Document 

In a Small and Medium-sized Enterprise (SME) IPO, the Offer Document serves as a report that provides prospective investors with comprehensive information about the company seeking to sell its shares. It provides crucial information about the company’s financial situation, future plans, investment risks, and how it intends to use the proceeds from the sale of its shares. The stock exchange receives this document and reviews it to ensure that it is truthful and transparent. This procedure fosters confidence between the business and potential investors. 

3. Exchange Approval

For a large company’s IPO, all the details are checked by SEBI (market regulator) but for an SME IPO the papers are sent directly to the stock exchanges BSE SME or NSE Emerge. Here’s a key difference from a big IPO. The exchange acts as the main checker itself acts as the main checker and its team reviews the documents and checks the company’s office before giving the green light. This makes the SME IPO process much faster.

4. Marketing & Roadshows

Once the exchange gives the company a thumbs up, the company and its bankers start marketing the IPO. They hold “roadshows,” which are meetings with potential big investors to build excitement for the upcoming share sale.

5. The Bidding

The IPO is then opened to the public for a few days, usually 3 to 5. During this time, investors like you can apply for shares through their trading or bank accounts, this is known as the bidding period.

6. Allotment

After the bidding closes, the shares are distributed but if more number of shares were applied for than were available (oversubscription), then the allotment for individual investors is usually done using a fair, computerized lottery system.

7. Stock Market Listing

Finally, the company’s shares are officially listed on the BSE SME or NSE Emerge platform. From this day traders can start trading on these listed shares and you can easily buy and sell the company’s shares on the open market.

Advantages of SME IPO

• High Growth Potential: At start you invest in a company that is still small but can grow into a large corporation in the future, growing your investment simultaneously. 
• Discovering Hidden Gems: Generally these companies are not fully focused by financial experts and are even unique in the market. Here you have a chance to find these businesses before they become famous in the market. 
• Strong Promoter Involvement: In most SMEs, the founders run their company dedicatedly and being a small business they have high motivation to make their business a success. 

Read Also: What is a Confidential IPO Filing?

Disadvantages of SME IPO

Investing in small, growing companies is naturally a high-risk, high-reward game, before investing you should always know great returns come  with big risks. That’s why regulators have made the rules stricter, to make sure that only investors who understand and can afford these risks are participating.

• Higher Volatility: The share prices of smaller companies can be very volatile in nature as it can go up or down much more sharply and quickly than the shares of large, financially stable companies.
• Lower Liquidity: Since fewer people trade SME stocks, it might be harder to find a buyer right when you want to sell, as lower liquidity means a less demand and supply of shares. 
• Limited Information: There is a lot of information available about large, well-known companies. SMEs are smaller and have a shorter history, so it can be more difficult to research them thoroughly.
• Business Risk: A small business is more fragile. A tough year for the economy or a new competitor could hit an SME much harder than a large corporation. The risk of the business failing is higher.

Read Also: From Private to Public: Decoding the IPO Journey

Conclusion

SME IPOs not only raise money but they act as a launchpad for small rising businesses to become prominent in the market. Platforms like BSE SME and NSE Emerge help these growing businesses in evolving to a national company which ultimately helps in creating jobs and boosting our economy along the way.

For investors, this opens up a new world of opportunities. But it’s a world that requires knowledge as these businesses have high potential returns but there are some major risks attached to it. The main key is to do your research and understand the working of these companies, as well as the future growth plan of these companies. One should understand and make their investment wisely. 

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