Understanding SME IPOs in India: Meaning, Process & Benefits

Small and Medium Enterprises (SMEs) are vital to India’s economy, driving employment and GDP growth. SME IPOs offer these businesses a specialised route to raise equity capital by listing on dedicated platforms. This article outlines the meaning, eligibility, process, and benefits of SME IPOs for both companies and investors.

An SME IPO is the public offering of shares by a small or medium-sized enterprise through a recognised SME platform such as BSE SME or NSE Emerge. Unlike mainboard IPOs, SME IPOs cater specifically to smaller companies with lighter compliance requirements and lower cost structures.

SEBI and stock exchanges have defined specific eligibility norms for SMEs looking to go public. Key criteria include:

• Net Tangible Assets: Minimum of ₹1.5 Crores
  

• Net Worth: At least ₹1 Crore
  

• Track Record: Minimum operational history of 3 years (with some relaxations)
  

• Profitability: Positive cash flow from operations for at least 2 years
  

• Post-issue Paid-up Capital: Not exceeding ₹25 Crores
  

These conditions ensure that only stable and growth-oriented SMEs are allowed to list.

In India, small and medium enterprises (SMEs) can raise capital through dedicated IPO platforms designed to meet their unique requirements while ensuring regulatory compliance.

BSE SME Platform

Launched in 2012, BSE SME is India’s first platform dedicated to SME listings. It provides a cost-effective and simplified listing framework, backed by BSE’s robust trading infrastructure.

NSE Emerge

NSE’s dedicated SME platform enables smaller businesses to reach a wider investor base with streamlined regulatory procedures and strong governance norms.

The following is a step-by-step guide to launching an SME IPO:

Step 1: Appointment of Merchant Banker

The company appoints a SEBI-registered Merchant Banker to manage the IPO process, including due diligence and documentation.

Step 2: Drafting of Offer Document

An offer document (similar to a DRHP) is prepared and filed with the exchange. Unlike mainboard IPOs, this does not go to SEBI for review.

Step 3: Exchange Review and In-Principle Approval

The stock exchange reviews the offer document and grants in-principle approval for listing.

Step 4: IPO Opening and Subscription

The SME IPO is open for public subscription for 3 to 5 working days. Investors apply through the ASBA mechanism.

Step 5: Allotment and Listing

Once allotment is complete, shares are credited to demat accounts and trading begins on the SME platform.

SME IPOs offer a distinct framework that balances accessibility with investor safeguards. Here are some of their key features:

• Lower Compliance Requirements: Simplified listing norms tailored for small companies
  

• Minimum Lot Size: Higher compared to mainboard IPOs to ensure serious participation
  

• Market Making: Mandatory for 3 years to ensure liquidity in the stock
  

• Visibility and Credibility: Listed status enhances the company’s public image and credibility with stakeholders
  

Listing through an SME IPO offers several strategic advantages that can support long-term growth and stability for small businesses, such as:

Access to Capital

Listing enables SMEs to raise equity capital for business expansion, R&D, working capital, or debt repayment.

Increased Credibility

Being listed enhances brand perception among customers, vendors, and partners.

Liquidity for Shareholders

Promoters and early investors gain an exit or partial monetisation opportunity.

Valuation Benchmark

Market listing helps establish a public valuation, useful for strategic decisions and future fundraising.

For investors, SME IPOs present unique opportunities that align with both diversification and early-stage growth potential, including:

Early Access to Growing Companies

Investors can get in early with high-growth businesses that may become tomorrow’s large-cap firms.

Diversification

SME stocks offer exposure to sectors or regions underrepresented in the mainboard indices.

Potential for Higher Returns

If chosen carefully, SME IPOs may offer significant long-term capital appreciation.

While SME IPOs offer potential benefits, investors should be mindful of certain risks before participating, such as:

Low Liquidity

Due to limited investor participation and higher lot sizes, SME stocks may not be as liquid as mainboard stocks.

Business Risk

SMEs are often more vulnerable to market cycles, funding challenges, and management issues.

Information Availability

Limited analyst coverage and public data may make informed decision-making harder for investors.

SEBI and stock exchanges ensure fair practices through mechanisms such as:

• Mandatory Market Making for liquidity
  

• Periodic Financial Disclosures
  

• Promoter Lock-in Periods
  

• Surveillance Measures to prevent manipulation
  

These safeguards aim to build investor trust while supporting the SME ecosystem.

SME IPOs present a valuable opportunity for both small businesses and discerning investors. However, like all equity investments, SME IPOs must be approached with due diligence and awareness of associated risks.

This content is for informational purposes only and the same should not be construed as investment advice. Bajaj Finserv Direct Limited shall not be liable or responsible for any investment decision that you may take based on this content.