What is SME IPO, Meaning & How It Works?

What is SME IPO?

Small and Medium Enterprises (SMEs) trigger innovation, drive economic growth, and create employment across sectors like services, agriculture, and manufacturing, significantly contributing to GDP and export earnings. However, they often struggle to access capital due to stringent bank requirements, high interest rates, and collateral needs. Therefore, SME IPOs (Initial Public Offerings) were introduced to help SMEs raise funds directly from the public by listing shares on the stock exchange.

Features of SME IPOs

Lower Investment and Turnover Thresholds 

One of the main features of SME IPOs is their lower entry barrier compared to other IPOs. These barriers include reduced requirements for investment and turnover, making it easier for smaller, budding enterprises to qualify for listing on the stock exchange. This inclusive approach ensures that smaller enterprises with lower revenue and profits access public funding. 

Listing on Separate Platforms Dedicated to SMEs

There are dedicated platforms designed specifically for SME IPOs. In India, these platforms are NSE Emerge and BSE SME Platform. They are tailored to meet the needs of smaller enterprises, providing a supportive environment different from the main stock exchange where larger companies are listed.

This separate listing helps ensure that smaller businesses are adequately catered to in terms of regulatory requirements and market expectations. For those with questions on ‘how to invest in SME IPO and how to buy SME IPO’ this is a very important fact to note. 

Also read: Guidelines for Listing

Restrictions on Trading

While there are separate platforms for SME IPOs to be listed on, trading is often restricted to the specific SME exchange where they are listed. This restriction is important as it helps to maintain a controlled trading environment best suited to the smaller scale and liquidity of SME shares. It also protects investors by ensuring trading occurs within a set framework designed to handle the specific characteristics of SME stocks. 

Also read: BSE and NSE

Benefits of SME IPOs

1. Access to Capital: The main benefit of SME IPOs is that they provide an alternative method for SMEs to raise capital for their business. Unlike traditional loans, which require interest to be paid on repayment, equity funding through IPOs does not burden the small enterprise business with debt. This benefits SMEs looking to finance their expansion, development, and research. 
2. More Visibility and Credibility: Listing on the stock exchange significantly boosts an SME’s visibility and credibility, which attracts potential investors, business partners, and customers. A successful IPO signals to the market that the company has met all regulatory requirements and has growth potential. 
3. Liquidity for Investors: SME IPOs offer liquidity for their existing shareholders. This allows them to sell their shares in the open market.This is also attractive to early investors and employees with equity in the company. It provides them with an opportunity to maximise the value of their investment. 
4. Valuation and Growth: When an SME goes public, it helps in proper valuation of the company and provides a market-determined price for its shares. This serves as a benchmark for future fundraising and can attract more investment.

Additionally, the funds raised by an IPO can be used to grow and expand the enterprise, helping the company achieve its strategic objectives. 

SME IPO Listing Requirements

Minimum Paid-Up Capital and Net Worth 

The company must meet minimum requirements regarding paid-up capital and net worth to qualify for an SME IPO. The stock exchange sets thresholds for SMEs that are lower than those required for listing on the main stock exchange. 

Profitability Track Record or Alternative Performance Criteria 

Small and medium enterprises (SMEs) seeking to be listed through an SME IPO must demonstrate a track record of profitability or meet performance criteria set by the stock exchange. This ensures that only companies that have displayed a reasonable chance of success and sustainability are listed, which provides some protection to investors. 

Post-Issue Shareholding Restrictions 

Restrictions are set on post-issue shareholding patterns. This typically requires promoters to retain a significant stake in the company. This ensures that the promoters stay committed to the business and have a vested interest in the company's success, which also boosts an investor’s confidence. 

Read more: Types of IPOs

How to Apply for SME IPOs

You can apply for SME IPOs through various apps or websites, including the ShareKhan app.

Step 1: Download the Sharekhan app and log in.

Step 2: Tap on the hamburger menu, click on Equity’s dropdown menu, then tap on IPO/OFS/BOND to land on the IPO dashboard.

Step 3: Now click on the current IPO tab and select your chosen IPO.

Step 4: Once the IPO application form opens, fill in all the details like the category of investor, demat account number, the number of lots you want to invest in, the cut-off price and more.

Step 5: Enter your verified UPI ID on the form. This UPI ID should be connected to your Sharekhan-mapped bank account.

Step 6: Read all the terms and conditions and accept them. Click on the SUBMIT button. Recheck all the details before confirming the order.

Step 7: Once the exchange receives your bid details, you will be notified (IPO mandate request) on your UPI app. You will also receive an SMS.

Step 8: Log in to your UPI app and go to the pending mandates section.

Step 9: Verify all details and authenticate your bid amount by entering your UPI PIN.

Step 10: Your IPO application amount will be blocked once this is done. You will be notified via SMS.