SME Initial Public Offerings (IPOs)

An SME IPO refers to the initial public offering of shares by Small and Medium Enterprises that list their securities on SME platforms of stock exchanges such as NSE EMERGE and BSE SME. Unlike regular IPOs by large companies, SME IPOs target smaller firms with relatively modest capital requirements and offer investors an opportunity to invest in emerging businesses at an early stage.

SMEs are integral to the Indian economy, accounting for over 45% of manufacturing output and 40% of exports. Despite their economic importance, these enterprises often struggle with limited access to institutional funding. SME IPOs provide an alternative route for capital raising, allowing these companies to broaden their investor base, improve transparency, and foster growth.

The eligibility conditions for SMEs wishing to list on the SME platforms are tailored to accommodate their unique operational and financial profiles while ensuring investor protection.

Key eligibility requirements include:

• Financial Benchmarks:
  

  • The SME must have a track record of at least 3 years.
    

  • Net tangible assets must be a minimum of ₹1 Crore.
    

  • Positive net worth and profitability in at least one of the previous 3 years.
    

  • The SME should have an aggregate trading turnover of at least ₹1 Crore in the preceding financial year on the SME exchange.
    

• Regulatory Compliance:
  

  • Compliant with the Companies Act and SEBI (Issue of Capital and Disclosure Requirements) Regulations (ICDR) applicable to SME listings.
    

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

• Company Structure:
  

  • Eligible entities include private limited companies that convert to public limited companies before listing, unlisted public limited companies, or existing SMEs seeking additional funding.

These relaxed but prudent criteria balance the need for SME funding with investor safeguards.

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 these steps:

• Open a Demat and Trading Account:
  Investors must have a demat account to hold shares electronically and a trading account to subscribe through brokers.
  

• KYC Compliance:
  Submit valid documents such as PAN card, Aadhaar, and proof of address.
  

• Access IPO Application:
  Application forms are available online on stock exchanges and brokers’ platforms.
  

• Fill Application Form:
  Provide details like investor category, bid quantity (multiples of lot size), and bid price.
  

• Payment via ASBA:
  Application Supported by Blocked Amount (ASBA) ensures funds are blocked in the bank account until allotment, improving fund utilisation.
  

• Submit and Track Application:
  Investors receive confirmation and can track the application status until allotment.

• Higher Minimum Investment: Typically requires a minimum investment of ₹1–2 lakhs, unlike mainboard IPOs with lower entry points.

• Greater Risk & Reward: SME stocks can offer high growth potential but come with higher volatility and business risk.

• Limited Liquidity: Shares may have lower trading volumes, making buying/selling less flexible.
  

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

• Shorter Track Record: Many SMEs may be early-stage businesses with limited financial history or public performance data.

• Less Analyst Coverage: SME IPOs usually receive minimal institutional research, requiring more investor due diligence.

• Early Access to Growing Companies:
  SME IPOs provide investors the opportunity to buy shares in promising small businesses early.
  

• Potential for High Returns:
  Successful SMEs can deliver significant growth, translating into capital appreciation for early investors.
  

• Diversification:
  SME stocks diversify investor portfolios beyond large-cap stocks and sectors.
  

• Support to MSME Sector:
  Investment aids the growth of SMEs, which are crucial for employment and economic development.

• Higher Risk and Volatility:
  SMEs are often less stable than large companies, with less predictable earnings and higher market volatility.
  

• Limited Market Liquidity:
  SME stocks may have lower trading volumes, affecting ease of buying and selling.
  

• Inadequate Disclosure or Track Record:
  Smaller firms might have less extensive financial history and disclosures.
  

• Regulatory Risks:
  Changes in government policies affecting SMEs can impact performance.
  

Investors should conduct thorough due diligence and consider risk tolerance before investing.

Investors can find SME IPOs listed on platforms like NSE EMERGE and BSE SME. These exchanges maintain updated lists of upcoming, ongoing, and past SME IPOs on their websites.

Additionally, financial news portals, brokerage websites, and SEBI’s official platform provide timely notifications and detailed documents related to SME IPOs.

Tracking official filings such as the Draft Red Herring Prospectus helps investors make informed 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 they carry higher risks compared to established company IPOs, SME IPOs can yield substantial rewards if approached with careful analysis and an understanding of market dynamics. 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.

1. Bajaj Finserv Markets – What is SME in IPO
   

2. Securities and Exchange Board of India (SEBI)
   

3. National Stock Exchange (NSE) EMERGE
   

4. Bombay Stock Exchange (BSE) SME Platform
   

5. Investopedia – SME IPO
   

6. Zerodha Varsity – SME IPO