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SME IPO………….ONE OF THE UNIQUE WAY FOR FINANCING YOUR BUSINESS AND MULTIPLYING WEALTH

IF YOUR BUSINESS IS GOOD GROWING, IF YOUR BUSINESS IS PROFITABLE, IF YOUR BUSINESS HAS GOOD REALISTIC PROJECTIONS, IF YOUR BUSINESS HAS POTENTIALS TO GROW HORIZONTALLY AND VERTICALLY AND IF YOU ARE VISIONER……….READ THIS KNOWLEDGE SHAREING

For any business in the world, FINANCE is the 1^st and pre-requisit to establish and run the business and to write its growth story. Many profitable business do not survive due to availability of finance or due to availability of finance at high cost. There are many ways to finance business…i.e. own capital, Loan Funds from banks, Financial institutions, Debt fund , Unsecure loan funds , Pvt Equity, Public equity funds and so on and so forth… but for the growth of business , for developing business horizontally and vertically, low cost fund can play the crucial roll for the whole growth story. 

Funding business through debt instrument is the costly affair up to some extent because its schedule repayment some time creates financial crunch and reduce profitability. Own capital has its own limitations…. Because many times our own capital are not that much to meet with all financial obligations in a business, then we have to resort on debt funds like loans from outside agencies like bank , Financial institutions, Unsecured and so on. The same requires availability of security to mortgage  for getting low cost fund and some time there are limited securities to offer also. In these all situations, ultimately Business growth suffers a lot and do not grow as it deserves. 

As we know, MSME plays key roll in development of our economy and if MSME does not grow due to financial factor, then ultimately economy growth suffers. To overcome these limitations and to give growth force to MSME, Government of India came with the amicable alternative financing business and to meet with the capital need …. In 2012, first time SME IPO was introduced.

Let us understand all about the SME - IPO

What is SME ?

SME full form is Small and medium-sized enterprises. It refer to a business that falls within a certain size range in terms of employees, revenue, or assets. Generally, smaller-scale businesses, compared to larger corporations, may vary in their specific criteria for classification as an SME by country.

CRITERIA	SMALL ENTERPRISE	LARGE ENTERPRISE
Investments	Rs. 1 Crores to 10 Crores	5 Crores to 50 Crores
Turnover Amount	Rs. 10 Cr to Rs. 20 Cr	50 Crores to 100 Crores

However, limited access to capital can be a primary hurdle confronting SMEs.. To resolve this issue, they frequently opt for an SME IPO to secure funding from the stock market through public issue.

What is SME IPO Meaning?

SME IPO means an initial public offering made by SMEs to raise capital by selling equity shares to the public. These offerings are regulated by SEBI and are designed to meet the specific needs of SMEs. While a normal or mainboard IPO requires the company to adhere to specific guidelines regarding the size of the company, SME IPOs have more relaxed guidelines, enabling even smaller companies to directly access capital from the public in the stock market.

SMEs account for a significant portion of economic activity, particularly in emerging markets. Their contribution to Nation is uncountable in terms of economic growth, generating employment, increasing good governance, increasing healthy business environment so on and so fourth…………..

SME IPO – Eligibility Criteria

Important criteria for listing on Stock Exchange and raising capital funds:

• The SME must be incorporated under the Companies Act, 1956.
• The face value  of the SME should not exceed ₹25 Crore (post-issue paid-up capital).
• Valuation should assess the net tangible assets of the SME at ₹1.5 Crore.
• If the conversion of partnership/proprietorship/LLP firms established the SME, it must have a minimum track record of three years.
• The SME must follow good governance in the areas of administration, accounting, periodi compliances and professional management.
• The SME is required to have a functioning website.
• The promoters of the company should remain unchanged for a period of at least one year following the filing of the IPO.
• The SME must be willing to engage in the trading of Demat securities.
• The depositories expect the SME to enter into a contractual agreement.

·        The eligibility criteria for directors, promoters, and investors involved in SME IPOs are consistent with those for regular IPOs. Therefore, these individuals are not defaulters, offenders, or disqualified from accessing the capital markets.

SME IPO Exchanges: Where Are They Listed?

In the year 2012, the NSE and BSE jointly inaugurated two exchanges dedicated to the listing of SME IPOs. These are:

• The BSE SME platform operated by the Bombay Stock Exchange
• NSE EMERGE managed by the National Stock Exchange

BSE Guidelines

• Net Tangible assets of at least Rs.3 crores as per the latest audited financial results
• Net worth (excluding revaluation reserves) of at least Rs.3 crores as per the latest audited financial results.
• Track record of distributable profits in terms of sec. 123 of the Companies Act, 2013 for at least two years out of immediately preceding three financial years and each financial year has to be a period of at least 12 months. Extraordinary income will not be considered for the purpose of calculating distributable profits OR Net worth shall be at least Rs. 5 crores.
• The post-issue paid-up capital of the company shall be at least Rs.3 crores.

SEBI Guidelines

• Minimum Issue Size: Rs. 10 crores and a maximum of Rs. 25 crores.
• Min No. of members for Issue – 50
• Minimum post-issue paid-up capital: Rs. 10 crore (higher than SEBI’s Rs. 3 crore requirement).
• Minimum number of trading members: 25
• Minimum Application Value: Rs. 1 lakh for retail investors and Rs. 5 lakh for non-retail investors.
• Lock-in Period: Promoters’ shares are subject to a lock-in period of 3 years from the date of listing.
• Track Record: At least 3 years of operations for the company or its promoters
• The SME cannot reapply for an IPO for a minimum period of six months if we reject the application. Additionally, the minimum application and trading lot size must not fall below ₹1 lakh.

SME IPO Listing Process

Listing your SME on a stock exchange can be a great way to raise capital and boost your company’s profile. Here’s a breakdown of the SME IPO listing process:

Engage an Underwriter

Commencing the IPO procedure entails enlisting the services of a merchant banker, commonly referred to as an underwriter. This professional possesses adept knowledge of market dynamics and assumes a crucial role in formulating IPO-related documentation, encompassing particulars about share face value and selling price. Consequently, the appointed underwriter ensures the precision and integrity of the information provided by the SME.

Draft the DRHP

Prior to a company's public offering, potential investors seek in-depth insights into its operations and future prospects. Thus, the underwriter crafts a Draft Red Herring Prospectus (DRHP), enabling prospective investors to scrutinize the company's financial metrics and conduct market assessments to make well-informed investment decisions.

Lodge the DRHP In the context of a conventional IPO

companies lodge the DRHP with the Securities and Exchange Board of India (SEBI). Nevertheless, SMEs are required to submit and validate the DRHP with the Stock Exchange.

Publicize the IPO and Declare the Commencement Date

Upon approval of the draft by the Stock Exchange, underwriters append details such as IPO opening and closing dates, issue price, etc., and officially launch the IPO on a predetermined date. Consequently, at this stage, underwriters, banks, and the stock exchange are privy only to information regarding the company's intention to go public.

Launch the IPO and Allocate Shares

The final phase involves launching the IPO on the specified opening date, allowing investors to subscribe to a minimum lot of shares before the closing date. Post the closure, a select group of investors are allotted shares during the allocation process.

Upon the company's official launch of the IPO in the primary market and allocation of shares to investors, it achieves public status. Subsequently, other investors can procure its shares in the secondary market.

 

What is Difference Between IPO and SME IPO?

SME IPOs differ from regular IPOs in several key ways, including the listing criteria, disclosure requirements, and the role of merchant bankers. SME IPOs are initial public offerings (IPOs) designed for SMEs. Here are the key differences between SME IPOs and regular IPOs:

SME IPOs	Regular IPOs
Target SMEs	Target larger companies
Fewer regulatory requirements	Stringent regulatory requirements
Simplified disclosure and compliance rules	Complex disclosure and compliance rules
Less expensive and time-consuming	More expensive and time-consuming
Limited market liquidity	Higher market liquidity
Aimed at retail investors	Aimed at institutional investors.
Listed on the  NSE SME Exchange in India	Listed on NSE and BSE

 

Time budget generally requires SME IPO

From incorporation of Limited Company to Allotment of Shares and Listing on Stock Exchange…..it requires 3 to 5 months time period if all compliances and workings goes smoothly in a planned way.

Impact of SME IPO

Many emerging businesses face the challenge of securing capital for their expansion. While larger startups can explore various avenues such as engaging with private equity investors to access additional funds, smaller enterprises have fewer alternatives. A dedicated platform tailored for such companies could prove beneficial for both these businesses and potential investors. 

Additionally, the growing interest in investing in SMEs can be attributed to the expanding pool of SME stocks and higher returns. The encouraging backing from both the exchange board and investors can suggest a favourable environment for SME-IPOs in the Indian market. These SMEs may hold significance for the nation’s growth and contribute to increased employment opportunities in India.

Advantages of SME IPO

Advantages of SME IPOs Opting for an SME IPO can yield numerous advantages for small or medium-sized enterprises. Some of these advantages encompass:

• Enhanced Access to Capital: By transitioning to a publicly traded entity, SMEs can tap into a broader spectrum of capital compared to conventional bank loans or private equity funding.

• Augmented Visibility: Securing a public listing can significantly enhance an SME's visibility and reputation within the market, potentially attracting more attention from investors and stakeholders.

• Improved Liquidity: Listing on stock exchanges facilitates liquidity for shareholders, as the company's shares can be traded openly, providing an avenue for investors to buy or sell their holdings.

• Enhanced Valuation: A public listing often correlates with an increase in the valuation of a company, rendering it more appealing to prospective investors or potential acquirers, thus potentially unlocking additional growth opportunities.

Challenges and Risks of SME IPOs

While SME IPOs offer a range of advantages, they are accompanied by notable challenges and risks. Some of the key hurdles encountered by SMEs during the IPO journey include:

• Time-Intensive Process: Undertaking an SME IPO demands significant time and attention from management, as the process involves thorough preparation, documentation, and engagement with regulatory bodies and stakeholders.

• Market Fluctuations: The performance of an IPO is susceptible to market volatility, which can impact the company's valuation and investor sentiment, potentially leading to fluctuations in stock price post-listing.

• Regulatory Compliance Complexity: SMEs embarking on an IPO must navigate a complex landscape of securities laws and regulations, necessitating meticulous compliance efforts and in-depth understanding of regulatory requirements, which can pose challenges for smaller enterprises with limited resources.

•Financial Implications: The financial burden of going public can be substantial, encompassing expenses such as underwriting fees, legal fees, and accounting services costs, which can strain the resources of SMEs.

• Liquidity Constraints: Shares of SMEs may face liquidity challenges compared to those of larger, more established firms, resulting in limited trading activity and potential difficulties for investors seeking to buy or sell shares in the secondary market.

TO SUM-UP............

IF YOUR BUSINESS IS PROFITABLE ONE, IF YOU BELIEVES IN GOOD GOVERNANCE, IF YOU HAVE GOOD REALISTIC PROJECTIONS, IF YOU ARE VISIONER………….THIS IS THE RIGHT PLATFORM TO WIRTE YOUR GROWTH STORY…………..ONLY NEED IS TO HAVE RIGHT PROFESSIONAL TEAM TO READ YOUR PAST AND PRESENT FINANCIALS STATEMENTS , TO UNDERSTAND YOUR BUSINESS PLAN, TO REVIEW YOUR PROJECTIONS, TO COMPARE YOUR PROJECTIONS WITH INDUSTRY PEERS, TO COORDINATE MULTIPLE AGENCIES FOR IPO AND YOUR COMMITMENT TO EXPAND YOUR BUSINESS AND DEPLOY YOUR FUNDS IN MOST EFFICIENT WAY FOR THE MAXIMUM RETURNS ON INVESTMENTS……..BECAUSE NOW YOU ARE NOT ALONE….PUBLIC IS WITH YOU AND THEIR INVESTMENTS MUST GROW……THEN THE COMPANY WILL GROW AND YOU……….