SME Initial Public Offerings (IPOs)

An SME IPO is the initial public offering of shares by Small and Medium Enterprises (SMEs) on platforms like NSE EMERGE and BSE SME. Unlike large-company IPOs, they cater to smaller firms with modest capital needs and give investors early access to emerging businesses.

SMEs contribute significantly to India’s economy but often struggle to secure institutional funding. SME IPOs offer an alternative way to raise capital, broaden the investor base, and support growth.

The eligibility conditions for SMEs seeking to list on SME platforms are designed to suit their operational and financial profiles while ensuring adequate investor protection.

Key eligibility requirements include:

Financial Benchmarks:

• Minimum operating track record of 3 years
  

• Net tangible assets of at least ₹1 crore
  

• Positive net worth and profitability in at least 1 of the last 3 years
  

• Aggregate trading turnover of at least ₹1 crore in the previous financial year on the SME exchange

Regulatory Compliance:

• Must comply with the Companies Act and SEBI’s ICDR (Issue of Capital and Disclosure Requirements) Regulations
  

• No history of non-compliance or penal actions from stock exchanges/regulators in the past 3 years
  

Company Structure:

• Eligible entities include:
  

  • Private limited companies converting to public limited companies before listing
    

  • Unlisted public limited companies
    

  • Existing SMEs seeking additional funding

These balanced yet flexible criteria make SME listings accessible while safeguarding investor interests.

The SME IPO process follows steps similar to regular IPOs but is designed to be faster and less cumbersome for emerging enterprises:

Draft Red Herring Prospectus (DRHP) Preparation

The SME company prepares a DRHP containing detailed business information, financial statements, risk factors, promoters’ background, and intended use of IPO proceeds. This document is filed with SEBI for review.

SEBI Review and Approval

SEBI examines the DRHP and may request clarifications or additional disclosures. On completion of review, SEBI grants approval to proceed with the IPO.

Pricing and Issue Size

The SME company decides the IPO price, which can be fixed or determined through book-building. The issue size is typically smaller than regular IPOs, matching SME capital needs.

IPO Opening and Subscription

Investors apply for shares during the subscription window via their brokers or online trading platforms. SME IPOs generally have a minimum application size aligned with the lot size, which is smaller than for mainboard IPOs.

Allotment and Listing

Shares are allotted based on subscription levels. The company’s shares get listed on the SME platform of the stock exchange, making them tradable.

Applying for an SME IPO involves the following steps:

1. Open a Demat and Trading Account

• A Demat account is required to hold shares electronically.
  

• A Trading account is needed to subscribe through brokers.

2. Complete KYC Compliance

• Submit valid documents such as:
  

  • PAN Card
    

  • Aadhaar Card
    

  • Proof of Address

3. Access the IPO Application

• Application forms are available online via:
  

  • Stock exchange platforms (NSE/BSE)
    

  • Broker platforms and apps

4. Fill the Application Form

• Provide details such as:
  

  • Investor category
    

  • Bid quantity (in multiples of lot size)
    

  • Bid price

5. Make Payment via ASBA

• ASBA (Application Supported by Blocked Amount):
  

  • Ensures funds remain blocked in the applicant’s bank account until allotment.
    

  • Improves fund utilisation and prevents misuse.

6. Submit and Track Application

• Submit the completed application online or via broker.
  

• Receive confirmation of submission.
  

• Track allotment status through the stock exchange or broker portal.

SME IPOs come with unique features that distinguish them from regular IPOs on the mainboard. Investors should be aware of these characteristics before investing:

• Higher Minimum Investment: Typically requires ₹1–2 lakhs, compared to lower entry points in mainboard IPOs.
  

• Greater Risk & Reward: Offers potential for high growth but comes with increased volatility and business risk.
  

• Limited Liquidity: Trading volumes are usually lower, which can make buying and selling shares less flexible.
  

• Compulsory Market Making: A market maker is appointed to ensure liquidity and maintain price stability after listing.
  

• Shorter Track Record: Many SMEs are early-stage businesses with limited financial history and public data.
  

• Less Analyst Coverage: These companies generally receive less institutional research, requiring investors to conduct deeper due diligence.

SME IPOs present an alternative route for capital access in emerging businesses. For investors, they serve as an option to diversify portfolios with early-stage enterprises, albeit with higher associated risks.

• Early Access to Growing Companies: Opportunity to invest in growing companies at an early stage.
  

• Potential for High Returns: Possibility of significant returns if the company performs well.
  

• Diversification: Adds variety to a portfolio by including smaller companies beyond large-cap stocks and mainstream sectors.
  

• Support to MSME Sector: Investments in SME IPOs contribute to the development of India’s MSME ecosystem, which plays a vital role in job creation and economic growth.

While SME IPOs offer growth potential, they also come with unique risks that investors must carefully evaluate before committing capital. Some of the key risks include:

• Higher Risk & Volatility: SMEs tend to be less stable than large companies, with earnings that are often unpredictable and share prices prone to sharp fluctuations.
  

• Limited Market Liquidity: Trading volumes are usually lower, which can make it difficult to buy or sell shares quickly at desired prices.
  

• Inadequate Disclosure or Track Record: Many SMEs have shorter operating histories and limited financial transparency compared to larger firms.
  

• Regulatory Risks: Policy changes or compliance challenges may significantly impact SME performance.

Investors should conduct thorough research and assess their risk tolerance before investing in SME IPOs.

Investors can track SME IPO opportunities through the following reliable sources:

• NSE EMERGE and BSE SME Platforms: Both exchanges publish updated lists of upcoming, ongoing, and past SME IPOs on their official websites.
  

• SEBI Website: Provides official notifications, filings, and detailed documents related to SME IPOs.
  

• Brokerage Platforms: Many brokers offer SME IPO details and allow online applications directly through their trading portals.
  

• Financial News Portals: Websites like Moneycontrol, Economic Times, and Business Standard regularly update SME IPO news and performance.
  

• Draft Red Herring Prospectus (DRHP): Reviewing official DRHP filings gives investors in-depth insights into company fundamentals and risk factors.

By actively monitoring these sources, investors can stay updated on SME IPO opportunities and make informed participation decisions.

An IPO (Initial Public Offering) refers to the process where a company offers its shares to the public for the first time, typically large and well-established firms listed on the main exchanges like NSE or BSE. In contrast, an SME IPO is designed for Small and Medium Enterprises and is listed on dedicated platforms such as NSE Emerge or BSE SME. While mainboard IPOs follow stricter compliance norms and attract a broader investor base, SME IPOs have relaxed regulatory requirements, higher minimum investment thresholds (usually ₹1–2 lakh), lower liquidity, and require compulsory market making to ensure tradability.

SME IPOs are a critical mechanism to bridge the funding gap for Small and Medium Enterprises while offering investors a unique opportunity to participate in emerging business ventures. Although SME IPOs carry higher risks compared to established company IPOs, understanding their structure and evaluating them objectively can help investors make more informed decisions. For India’s economic growth and investor diversification, SME IPOs play a pivotal role.

This content is for educational 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.