SME IPO Consultants

A Public Limited Company (“Issuer”) can raise funds from public by issuing its fresh equity shares through an Initial Public Offer at the SME segment of the nationwide Stock Exchanges i.e. NSE Emerge or BSE SME, subject to the specified conditions.

Till June 2024, 1008 companies have raised INR 17,850 crore through SME IPOs (BSE SME and NSE EMERGE platforms) across 60+ industries with cumulative market cap of INR 3.36 Lakh crores as on 30th June, 2024 resulting in average 430% Incremental Valuation over Issue Price. Last 3.5 years have been a milestone for SME IPOs as 459 companies got listed at SME Stock Exchanges and raised INR 11,250 crore which represents 45% in Number and 63% in value of total SME IPOs. This upsurge was primarily driven by robust Indian Capital markets and heightened Investor interest showcasing the power of Small and Medium Enterprises (SME) in India.

Till June 2024, more than 323 companies have been migrated to BSE and NSE Stock Exchanges from out of 1008 companies listed on BSE SME and NSE Emerge.

SME IPO has been beneficial for the Indian Economy and creates value unlocking for Companies, Promoters and Investors apart from incremental Government Tax Revenue. SME IPO leads to Equity Fund Raising and also works as a tool for Exit Opportunity for Investors. It also strengthens company’s ability to reduce its cost of Debt along with realising the power of Listed Shares which can work as Collateral. SME IPO has inbuilt provision for 100% Underwriting of the Issue and relaxed post listing compliances combined with reduced timelines of IPO process. SME IPO also opens the gate towards listing on BSE/NSE mainboard through migration process. Attractive issue prices under SME IPO are encouraging the interest of QIB Investors and Retail Investors in this booming Indian Capital markets.

For Example: 950 companies who raised funds of about INR 16000 Crore through SME IPO platform are now worth INR 2,50,000 Lakh Crore.

• It is necessary to convert the proprietorship / firm / Private company to a Public Limited Company
• Establishing the appropriate capital structure.
• Increasing the Authorized Share Capital is required based on the post-issue capital structure.
• Approval of the Board of Directors and Shareholders of the Company is necessary to approve the issuance of shares.
• Restructuring the company’s financials to align with the longer-term vision is essential.
• Gathering information for the preparation of the Draft Red Herring Prospectus (DRHP) and committing time and resources of the legal, finance team, management, and promoters are required.
• Appointment of a Company Secretary and CFO is necessary.
• Appointing 50% Independent Board members, including at least one female Director, is mandatory.
• Restating financial statements for the last three years through Peer Reviewed Auditors (Financials shall not be older than six months at the time of submission of the Offer Document with the stock exchange) is required.
• The company should have its own website and logos of the, if not already in place, they should be prepared.

Track record of at least three years is required of:
i. The applicant seeking listing; or
ii. The promoters*/promoter company, incorporated in or outside India or,
*Promoters mean one or more persons with minimum 3 years of experience in the same line of business and shall be holding at least 20% of the post issue equity share capital individually or severally
iii. Proprietary / Partnership firm and subsequently converted into a Company (not in existence as a Company for three years) and approaches the Exchange for listing.

EBITDA should be positive in 2 out of 3 latest financial years preceding the   application date of SME IPO.

The Post Issue Paid up Capital should be Maximum of Rs. 25 crores. There is no minimum paid up Capital requirement for a SME IPO either pre issue or post issue except for broking companies on BSE SME.

  The Net Tangible Asset should be Rs 3 crores in last preceding (full) financial year for getting list on BSE SME. There is no requirement of Tangible Assets to list on NSE Emerge.

The Net worth should be Minimum of Rs. 1 crore for 2 preceding full financial years for getting list on BSE SME. Whereas only positive net worth is required to list on NSE Emerge.

The Leverage Ratio should be Maximum of 3:1 for getting listed on BSE SME. However, relaxation may be granted to finance companies. In case of NSE SME, there is no such requirement of Leverage Ratio.

• Minimum Promoter contribution i.e. 20% of Post Issue Capital would be locked in for 3 years from the date of allotment in the IPO.
• Excess of Minimum Promoter contribution: 1 year from the date of allotment in the IPO

The entire pre-issue capital held by persons other than the promoters shall remain Locked in for 1 year from the date of allotment in the IPO.

One lakh Rupees per application

  There is need to comply with the minimum offer to the public as per the provisions of clause (b) of sub-rule (2) of rule 19 of Securities Contracts (Regulations) Rules, 1957.

  The number of allottees should be at least 50.

100% underwriting (minimum 15% by the Merchant Banker itself) is   mandatory for SME IPO.

The market maker aids in addressing liquidity challenges faced by stocks of small and medium enterprises (SMEs). Market making is a compulsory requirement for all securities listed and traded on the SME Exchange. Investment banks facilitate market making through brokers operating in the SME segment for a minimum of 1.25% of post issue up capital for the minimum duration of three years, starting from the date of the security’s listing.

The application of the applicant company should not have been rejected by the Exchange in last 6 complete months.

The minimum application and trading lot size shall not be less than Rs. 1,00,000. Standardize lot size for Initial Public Offer proposing to list on SME exchange/platform, as given under:

Approx. 6 months subject to fulfilment of statutory requirements and      readiness of the promoters and management.

 Company will have to file their financials and shareholding pattern to exchange half-yearly after listing on SME Exchange.

Unlisted equity holdings are subject to short-term capital gains taxation at rates potentially reaching 30%, while long-term capital gains tax stands at 20%. In contrast, listed securities enjoy a more favourable tax regime, with short-term capital gains taxed at 15% and long-term capital gains taxed at 10%, contingent upon the payment of Securities Transaction Tax by the investor.

• Submission of DRHP/Draft Prospectus – These documents are prepared by the Merchant Banker and filed with the Exchange as well as with SEBI as per requirements.
• Verification & Site Visit – Exchange verifies the documents and processes the same. A visit to the company’s site shall be undertaken by the Exchange official. The Promoters are called for an interview with the Listing Advisory Committee.
• Approval – Exchange issues an In Principle approval on the recommendation of the Committee, provided all the requirements are compiled by the Issuer Company.
• Filing of RHP/Prospectus – Merchant Banker files these documents with the ROC indicating the opening and closing date of the issue. Once approval is received from the ROC, they intimate the Exchange regarding the opening dates of the issue along with the required documents.

Company can migrate to migrate to mainboard via two routes i.e., Voluntarily and under Regulation 280 of SEBI (ICDR) Regulations 2023

 Voluntarily

An issuer, whose post-issue face value capital is more than ten crore rupees and up to twenty-five crore rupees, may migrate its specified securities to the main board of the stock exchanges subject to special resolution through postal ballot and fulfilment of the eligibility criteria for listing laid down by the Main Board.

Migration to main board due to Increase in capital by way of further issue: As per Regulation 280 of SEBI (ICDR) Regulations 2023

Where the post-issue face value capital of an issuer listed on a SME exchange is likely to increase beyond twenty-five crore rupees by virtue of any further issue of capital by the issuer by way of rights issue, preferential issue, bonus issue, etc. the issuer shall migrate its specified securities listed on a SME exchange to the Main Board and subject to the fulfilment of the eligibility criteria for listing of specified securities laid down by the Main Board

Provided that no further issue of capital by the issuer shall be made unless:

1. The shareholders of the issuer have approved the migration by passing a special resolution through postal ballot wherein the votes cast by shareholders other than promoters in favour of the proposal amount to at least two times the number of votes cast by shareholders other than promoter shareholders against the proposal.
2. The issuer has obtained an in-principle approval from the Main Board for listing of its entire specified securities on it.