SME IPOs is IPO for small and medium enterprise (SMEs). Usually, the companies with post-issue paid up capital between INR 3 crore and INR 25 crore. With the government push to encourage start-up companies, these SME IPOs bring a paradigm shift in the Indian capital market. Small and Medium companies are the backbone of any economy. These companies are the real employment creator in India. However, most of the time these companies struggle to gather the required capital to enhance their market share or to expand their product reach.
Relaxation in compliance makes life easy for SME IPOs and these companies are now offering IPOs to the public to meet their capital requirement. Of late, Investor has been taking interest in these IPOs. Considering the success rate of recently listed SME IPOs and increasing interest in retail participation, the launch of Small and Medium Enterprise IPOs is expected to go up in coming years. However, it is important to understand the fine lines of these companies before investing in SME IPOs.
How does SME IPOs work
Aftermarket regulator SEBI relaxed IPO norms for SMEs, these IPOs gained a lot of traction in the Indian capital market. SMEs can now come up with IPOs without an extensive track record of profitability or net worth.
These IPOs can trade on dedicated platforms such as the BSE SME and the NSE Emerge. This helps capital-starved SMEs to gain better liquidity and credibility without losing their ownership to foreign risk capital and Venture Capitalists. Over 247 SME IPOs listed on the NSE SME platform for small and medium businesses, as of 31st March 2022.
SEBI has reduced the compliance requirements for SME IPOs significantly as compared to the mainstream IPO offerings. However, the SME IPO process still involves substantial paperwork and the verification of facts and data about the company before getting approval.
The companies that are coming up with SME IPOs have to follow the process below.
- The company has to appoint a Merchant Banker or SME IPO consultant to help in underwriting the issue.
- SMEs have to submit the DRHP document for verification of the facts, accounts, and data. It is also important to make sure that all the data presented by the company are correct.
- As in the mainstream IPOs, these companies also have to submit a Red Herring Draft Prospectus that contains comprehensive information on the operations and prospects of the company.
- All documentation will undergo thorough verification as it is in main board IPOs.
- There will also be a site visit to further verify the accuracy of claims.
- Once all facts and data are verified successfully, the company got in-principle approval before the issue can be opened.
- Once receiving the in-principle approval, the SEMs can decide on a specific date to open its IPO.
- As regular IPOs, SMEs may also go for marketing and advertising.
- The SME IPOs will stay open for a few days for subscription.
- Once the issue is fully subscribed and shares are allotted, the SME stocks will start trading on the BSE SME or the NSE Emerge platforms.
- Investors can buy and sell these securities of the company on these platforms.
Are SME IPOs for retail investors?
Are SME IPOs for retail investors? the answer is ‘Yes’, a retail investor can invest in SME IPO directly during its subscription period. However, the lot sizes and size of investment are different from the main board IPOs. For a retail investor, it is a little risky as investing in these IPOs requires large sums of money. These stocks also have low liquidity post-listing. Hence, a retail investor must do proper due diligence about the company before investing.
However, many times it is much more rewarding than the main IPOs. Since investors enter the SME company at its growth stage by investing in SME IPOs, they got an early entry advantage. At this stage valuation of the company is very attractive. If the business of the company is lucrative and will grow in the upcoming future, investors get significant benefits. Over time, as the price and volumes improve, the stock can move to the main indices.
Difference between SME IPOs and Main IPO
Though the process of SME IPOs and main IPOs are almost similar, it is important to understand how they differ. Here are some key differences between the main board and SME IPOs.
- Usually, SMEs come up with public offerings at the early stage of their business cycle. Hence, it is difficult to understand the potential of these businesses and their management. With limited data, understanding and analyzing these businesses for investment are a little difficult. There are chances of losing money if fundamentals aren’t strong or if business deteriorates in the future. Hence SME IPOs are risky bets.
- The investment size in these IPOs is bigger than the main IPOs. The minimum investment in SME IPOs is over INR100,000. This is quite high for a retail investor in comparison to a main board IPO that required a minimum investment of INR14,000-15,000. These IPOs also trade with a minimum bid lot size of 2,000 shares. Investors can only trade multiples of this lot size. That makes these shares illiquid.
- Lower compliance for SME IPOs as against main IPOs. SEBI has relaxed the process of these IPOs. Unlike main board IPOs, SME IPOs are mostly managed by stock exchanges. Even the draft prospectus of an SME IPO is not verified by SEBI. The respective stock exchanges – where the SME is planning to be listed – examine and validate the documents of SMEs.
- In terms of regulations, SMEs don’t need to show profitability in at least two of the immediately preceding three financial years, they can show their net worth of at least INR3 crore for IPO. In the case of main board IPO aspirants, SEBI needs companies to have a minimum of INR15 crore in average pre-tax operating profit in at least three years of the immediately preceding five years.
- Main board IPO companies required a net worth of at least INR1 crore in each of the preceding three full years, while SMEs’ net worth can be INR1 crore as per the latest audited financial results.
- SME IPOs are required to be 100% underwritten which makes risky investing.
How to Apply for SME IPOs?
Can we apply SME IPOs in Zerodha or any such broker platform
How to Apply for SME IPOs? This is the first question that comes to the mind of a retail investor. Brokers or exchanges should create awareness about SME IPOs. It is easy to apply for an SME IPO as main board IPO. The process is same. One can log into his or her Demat account using valid credentials. Here is an example how to apply for SME IPOs in Zerodha broker account.
You can apply for both BSE SME and NSE SME IPOs through the UPI ASBA process on Zerodha. The process to apply for SME IPOs is the same as mainboard IPOs. After login into Zerodha, click on “Order” from the menu and click “IPO”. You will find both SME IPO and Mainboard IPOs in one place. Apply here for SME IPOs in a way you apply for regular IPOs.
Then the question is, where to sell SME IPOs? You can also sell SME IPOs in Zerodha or other such platforms as regular listed companies.
Should we invest in SME IPOs
Should we invest in SME IPOs and the answer is simple ‘yes’. As SME IPO comes at their growth stage, the valuation of these IPOs is low. It is important to choose the right company to invest in. To choose the right SME, do a detailed study on the industry, and the company’s past and future performance before investing. SME IPOs aim to allot at least 50% of the shares to retail investors. In case of healthy demand for that IPO, one can get significant profit from that investment
While SME IPOs tend to provide a higher element of risks in absence of stringent disclosures and profitability requirements, there is a possibility of investors getting strong profits if everything goes well. Higher the risk, the higher the profit. It is important to do your due diligence before investing.
More Across from our Website
We endeavor to help you to understand different aspects of a company before you invest in the company’s IPO. To know more information about business overview of each company, here are some suggested readings on company insights. 10 Best IPOs in 2022, Signature Global IPO, Tata Play IPO, upcoming IPOs, Find good companies to invest in.