blog/article/What is an SME IPO? Everything You Need to Know About SME IPOs

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What is an SME IPO? Everything You Need to Know About SME IPOs

Oct 12, 2024


When was the last time you considered investing in a company before it became a household name, widely recognized, and well-established? Small and Medium Enterprise (SME) IPOs offer investors the unique chance to do just that. SME IPOs offer a way for investors to discover overlooked opportunities. Although not widely recognized, these companies have strong potential for growth.

As many smaller companies aim to raise capital and fuel growth, SME IPOs have become an emerging segment that savvy investors can no longer ignore. As these companies go public, they bring both opportunities and challenges that are reshaping the way investors think about small-cap investments.


Unlike larger, properly well-established installed firms and groups within the mainboard stock market, SMEs regularly have untapped capability, offering a lucrative and profitable investment opportunity. But what precisely is an SME IPO, and the way does it differ from Mainboard IPOs? More importantly, how can investors benefit from this evolving market while navigating the risks involved? In this article, we find out everything you want to recognize about SME IPOs, from their objectives to raise funds to their particular features.


What is an SME IPO?


An SME IPO is a specialized initial public offering for small and medium enterprises and institutions that allows them to raise capital by way of selling shares to the general public. Its role is similar to the IPOs of larger firms and groups; however it is primarily based on meeting the precise needs and requirements of smaller businesses. The SME IPO market gives investors the opportunity to invest in corporations that may be at an earlier stage of growth in comparison to those listed on the main stock exchanges.


The SME IPO process is streamlined to accommodate smaller companies, making it much less expensive and less difficult for the ones corporations to raise funds at the same time as adhering to regulatory norms. In India, SME IPOs are listed on well-dedicated SME platforms consisting of the NSE Emerge and BSE SME.


Objective of the Issue for SME IPO


The objective of an SME IPO is simple: capital raising. However, the specific goals can range from business enterprise to enterprise. As in line with a couple of Draft Red Herring Prospectus (DRHPs), companies are attempting to raise capital essentially for debt compensation, supporting expansion obligations, and meeting working capital requirements. A large part of the funds raised originates from offer-for-sale (OFS) gives, wherein private equity (PE) and venture capital (VC) investors make their exit through preliminary initial public offerings (IPOs) and secondary market routes.


Recent Trend: The Rise in SME IPOs



During the financial year of 2024, there was a notable increase in the extensive number of SME IPOs being issued. Approximately ₹6,300 crore was raised with the aid of around 207 organizations together through the SME IPO route. This year saw small and medium enterprises reaching a record high, showing extended interest from investors in these opportunities.


Since 2021, evaluation of small and medium-sized enterprise corporation IPOs has found out that 40% of them have produced listing income of 25% or better, rendering them an attractive choice for investment. Although the appealing gains are listed, investors must additionally consider the future outlook of those corporations. It is well worth noting that 61% of SMEs listed on the stock market exceeded their initial gains after one year, indicating the ability for continued growth in thriving small and medium companies.


Features of SME IPOs


SME IPOs are increasingly attractive as an investment preference for numerous people, due to their distinct characteristics that meet the desires of both businesses and investors.


  • Retail Investor oriented: Small and medium enterprises IPOs set apart a selected portion for retail investors in their IPOs, allowing individuals with limited investment to participate. This allows common investors to take part in the feasible growth of small and medium-sized companies, making investment alternatives greater for a broader spectrum of individuals.
  • Potential for High Returns: Small and medium-sized enterprises are often in the starting phases in their expansion process. If the company manages to extend its operations and market presence, investing at this point can result in huge rewards. Greater risk can lead to greater reward. Although there's a risk because these companies are new and small, there's more potential for large returns if the business model is successful. 
  • Rising in Economic Growth:  Investing in SME IPOs can make a contribution to the development of local and nearby regional economies, as these corporations are the base and foundation of financial growth. Investors supporting these companies are helping the growth of a dynamic and competitive market that promotes innovation and several other opportunities for present-day ideas and products.
  • Enhance Market Visibility:  Small and medium-sized businesses gain more visibility through being included on a stock exchange. This more visibility could appeal to the interest of analysts, institutional investors, and feasible enterprise collaborators, all of whom can assist in the company's expansion opportunities. In addition, being listed increases the credibility and trust of your organization with stakeholders. This can also lead to improved consumer confidence and doubtlessly higher relationships with suppliers and partners.

SME IPO Listing – How it Works?


The SME IPO listing process involves several steps, just like a mainboard IPO but with a few key differences:

  • Filing the Draft Prospectus: The SME files a Draft Red Herring Prospectus (DRHP) with the Securities and Exchange Board of India (SEBI), disclosing the enterprise’s financials, risks, and objectives.
  • Approval and Subscription: Once the DRHP is allowed, the SME opens the IPO for subscription to investors. Retail and institutional investors can participate at some point of the subscription window.
  • Allotment and Listing: Shares are allotted to investors based on demand and the SME’s stock is listed at the SME platform of stock exchanges like NSE Emerge or BSE SME. Once listed, the stocks are open for public trading.


SME IPO Listing Criteria


BSE SME

NSE Emerge

Paid up Capital

Post issue capital < 25 crore

Post issue capital < 25 crore

Net Worth

> 1 crore for 2 preceding full Financial year. 

Positive

EBITDA

Positive in 2 out of 3 latest full financial years.

Positive in 2 out of 3 latest full financial years.

Leverage Ratio

Maximum 3:1

NA

Net Tangible Assets

>3 crore in last preceding financial year 

NA

Track Record

Minimum 3 years

Minimum 3 years



Why Invest in SME IPOs?

Investing in SME IPOs is a rewarding opportunity as it offers: 


  • High Growth Potential: SMEs companies generally tend to have growth potential that offers investors a chance to be a part of a company’s success in the long term.
  • Diversification: Investment in SME IPOs is an opportunity to diversify the investment portfolio with potential companies that might not be available and listed on stock exchanges.
  • Accessibility: Shares in SME IPOs can offer access to get at lower prices than those of large-cap companies which makes them accessible to a much wider range of investors.
  • Supporting Innovation: Investing in SMEs makes a contribution to fostering innovation and entrepreneurship that are necessary for economic growth.

Top 10 Performing SME IPOs in 2024

Listing Date

Company Name 

Issue Price  (₹)

Current Price (₹)

Listing Gain %

March 4 2024

Owais Metal and Mineral Processing Ltd.

87

1444

1559

Jan 18  2024

Australian Premium Solar(India) Ltd.

54

492

811

April 5, 2024

TAC Infosec Ltd.

106

812

666

Feb 15,2024

Alpex Solar Ltd. 

115

780

578

May 14  2024

Refractory Shapes Ltd. 

31

189

509

April 16,2024

Teerth Gopicon Ltd.

111

583

425

Jan 5, 2024

Kay Cee Energy & Infra Ltd.

54

267

395

May 14,2024

Winsol Energies Ltd. 

75

343

358

July 12 2024

Effwa Infra & Research Ltd.

82

353

330

August 2, 2024

SA Tech Software India Ltd.

59

239

306


 Comparing SME IPO vs. Mainboard IPO

Basis

SME IPO

MainBoard IPO

Post-issue Paid-up Capital

Between ₹1 crore and ₹25 crores

Minimum of ₹10 crores

Minimum Allottees in IPO

At least 50

At least 1000

Profitability

Positive operating profits for 2 out of the latest 3 financial years.



Last 3 years' average profit should be at least ₹15 crore.



Net worth

  Net worth of at least ₹1 crore for 2 preceding full financial years. 



Net worth of at least ₹25 crores in any 3 out of 5 financial years


Turnover

Between ₹5 to 50 crore

Above ₹50 Cr

Track Record

Relaxed norms  (operations of at least 3 years). 

Stringent norms  (previous 3-5 years.)  

IPO Underwriting

Mandatory (100% underwritten, with Merchant Banker underwriting 15%)

Non-mandatory, but if under 50% subscribed, compulsory to QIBs

IPO Application Size

₹1,00,000

₹10,000 - ₹15,000

IPO Timeframe

3 to 4 months

6 months onwards

Reporting Requirement

Half-yearly

Quarterly


Role of Retail and Institutional Investors in SME-IPOs


The participation of both retail and institutional investors is vital for the SME IPO. However, the function and role of these investors often differ:


Retail Investors: The retail investors have a portion of the shares to invest in SME IPO, and the required minimum investment could be greater compared to traditional IPOs. Retail investors need to carefully evaluate the risks before investing, as SMEs might not have the same financial stability as large organizations.


Institutional Investors: These investors bring in larger sums of capital and play a key role in the IPO subscription process. Their participation can build and enhance investor confidence, however, they will additionally have an impact on the stock's pricing and liquidity post-listing.


Conclusion


Small and Medium Enterprise (SME) IPOs represent an extensive opportunity for investors seeking to diversify their portfolios and get involved with the startup mindset of emerging companies. These services now not only provide crucial capital to SMEs but also growth and innovation however moreover allow investors to tap into sectors and organizations that could have been overlooked in the mainstream market.

The unique nature of SME IPOs lies in their potential for high returns, particularly for those willing to navigate the inherent risks associated with investing in smaller, less-established firms. With the right guidance and understanding of market dynamics, investors can benefit from the growth trajectory of SMEs, which often play a pivotal role in driving economic progress. As the landscape continues to evolve, keeping an eye on upcoming SME IPOs and understanding their fundamentals will be crucial for investors looking to seize the advantages these offerings present.