SME Stock Exchange - NSE SME Emerge IPO

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Overview, Legal Requirements and Other Aspects

SME IPO : Meaning

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.
Chapter IX of the SEBI (ICDR) Regulations, 2023 provides for the enabling provisions for SME IPO. BSE and NSE have further issued notices, circulars, guidelines etc to provide for the track record and eligibility conditions for companies proposed to be listed.

SME IPO : Benefits
Access to Equity capital and future financing opportunities
Generates liquidity for Investors and Promoters
Encourages growth of SME’s
Easier Listing Norms, Process and reduced Timelines
Only Stock Exchange approval required rather than SEBI approval
100% Underwriting of the Issue ensures success of IPO
Relaxed Post Listing Compliances
Unlocking of Shareholders Value
Reduced Tax Rate on Listed Shares
QIB Investors interest in SME IPO due to attractive Issue pricing
Fair Value automatically assessed by Market, post Listing
Enhanced Visibility and Credibility
Better Reputation and Brand recall in Industry
Better Corporate Governance
ESOP benefits for Employee Retention
Possible Transition to NSE / BSE Mainboard subject to specified conditions.

SME IPO (Exchange) Listing Criteria

Eligibility criteria for listing on BSE SME Platform

Eligibility criteria for listing on NSE Emerge Platform

Post Issue Paid up Capital: Max. Rs. 25 crores

Net worth:Min. Rs. 1 crore for 2 preceding full financial years.

Note: Cases in which a company is formed pursuant to conversion of registered Proprietorship /partnership/LLP then partnership firm/LLP needs to have Net Worth of Rs. 1 crores for preceding 2 (full) financial years.

Net Tangible Asset: Rs 3 crores in last preceding (full) financial year.

Track Record: Min. 3 years.

Where the applicant company has taken over a proprietorship concern/ registered partnership firm/ LLP, then the track record together with such proprietorship concern/ registered firm/ LLP should be atleast 3 years.

Further, as per latest guidelines of BSE, the applicant company seeking listing should have a track record of operations for atleast one full financial year and audited financial results for one full financial year.

Earnings before Interest, Depreciation and tax: Operating profit (earnings before interest, depreciation and tax) from operations for 2 out of 3 latest financial years preceding the application date.

Also, the company should have operating profit (earnings before interest, depreciation and tax) from operations for one full financial year preceding the application date.

Leverage Ratio: Max. 3:1. However, Relaxation may be granted to finance companies.

Additional Criteria for Micro Finance Companies:

Micro finance companies, in addition to the existing criteria for all SME companies, should have a Asset Under Management of at least Rs. 100 Crores, client base of 10000 & above and it should not have accepted / held public deposit.

Additional Criteria for Broking companies applying for SME IPO:

Networth and profit:

Minimum Rs. 5 crores with profit before tax of atleast Rs. 5 crores in any 2 years out of 3 financial years.
Or
Net worth of atleast Rs. 25 crores in any 3 years out of 5 financial years.

The Financial year should be for a period of 12 months. Extraordinary income will not be considered for the purpose of profits.

Net Tangible Assets: Min. Rs. 3 Crores as per the latest audited financial results.

Post issued Paid up capital: Minimum Rs. 3 crores.
Disciplinary action
No regulatory action of suspension of trading against the promoter(s) or companies promoted by the promoters by any stock Exchange having nationwide trading terminals.

The Promoter(s) or directors shall not be promoter(s) or directors (other than independent directors) of compulsory delisted companies by the Exchange and the applicability of consequences of compulsory delisting is attracted or companies that are suspended from trading on account of non-compliance.

Director should not be disqualified/ debarred by any of the Regulatory Authority.

Default
No pending defaults in respect of payment of interest and/or principal to the debenture/ bond/ fixed deposit holders by the applicant company, promoters/ promoting company(ies), Subsidiary Companies.

Name change
In case of name change within the last one year, at least 50% of the revenue calculated on a restated and consolidated basis for the preceding 1 full financial year has been earned by it from the activity indicated by its new name.

The activity suggesting name should have contributed to at least 50% of the revenue, calculated on a restated and consolidated basis, for the preceding one full financial year.

Other Requirements (for all companies):

It is mandatory for a company to have a functional website.
100% of the Promoter’s shareholding in the Company should be in Dematerialised form.
It is mandatory for the company to facilitate trading in demat securities and enter into an agreement with both the depositories.
There should not be any change in the promoters of the company in preceding one year from date of filing the application to BSE for listing under SME segment.
The composition of the board should be in compliance with the requirements of Companies Act, 2013 at the time of in-principle approval.
The Net worth computation will be as per the definition given in SEBI (ICDR) Regulations
The Company has not been referred to NCLT under IBC.
There is no winding up petition against the company, which has been admitted by the court.

Note: Cooling off period: Gap of at least 6 months from date of withdrawal/ rejection of issue from SEBI/Exchanges.

Post Issue Paid Up Capital: Max. Rs. 25 crore.

Track Record

Track record of atleast three years of either:
the applicant seeking listing; or

the promoters*/promoting 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

Proprietary / Partnership firm and subsequently converted into a Company (not in existence as a Company for three years) and approaches the Exchange for listing.

Operating profit (earnings before interest, depreciation and tax): Min. any 2 out of 3 financial years preceding the application and

Its net-worth should be positive.

Other Listing Conditions

The applicant company has not been referred to erstwhile Board for Industrial and Financial Reconstruction (BIFR) or No proceedings have been admitted under Insolvency and Bankruptcy Code against the issuer and Promoting companies
The company has not received any winding up petition admitted by a NCLT / Court.
No material regulatory or disciplinary action by a stock exchange or regulatory authority in the past three years against the applicant company.
Issuer seeking listing shall ensure that none of the merchant bankers involved in the IPO should have instances of any of their IPO draft offer document filed with the Exchange being returned in the past 6 months from the date of application. For this purpose, the left lead merchant banker and any other merchant banker if applicable who shall be responsible for due diligence activity and drafting of the draft offer document / offer document in terms of the Lead Managers’ Inter-se Allocation of Responsibilities shall be considered.

Disclosures
The following matters should be disclosed in the offer document:

Any material regulatory or disciplinary action by a stock exchange or regulatory authority in the past one year in respect of promoters/promoting company(ies), group companies, companies promoted by the promoters/promoting company(ies) of the applicant company.
Defaults in respect of payment of interest and/or principal to the debenture/bond/fixed deposit holders, banks, FIs by the applicant, promoters/promoting company(ies), group companies, companies promoted by the promoters/promoting company(ies) during the past three years.
The applicant, promoters/promoting company(ies), group companies, companies promoted by the promoters/promoting company(ies) litigation record, the nature of litigation, and status of litigation.
In respect of the track record of the directors, the status of criminal cases filed or nature of the investigation being undertaken with regard to alleged commission of any offence by any of its directors and its effect on the business of the company, where all or any of the directors of issuer have or has been charge-sheeted with serious crimes like murder, rape, forgery, economic offences.

Rejection / Cooling off period
The application of the applicant company should not have been rejected by the Exchange in last 6 complete months.

Key highlights of requirement in SEBI Listing regulation applicable to companies irrespective of listing apply for listing on NSE Emerge and BSE SME

Minimum Promoter Contribution: Minimum 20% of the post-issue capital

Lock-in of specified securities held by the promoters:
Minimum promoter contribution: 3 years from the date of commencement of commercial production or date of allotment in the initial public offer, whichever is later;

Excess of Minimum promoter contribution: 1 years from the date of allotment in the initial public offer

Lock-in of specified securities held by persons other than the promoters
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 initial public offer.

Minimum offer to public: 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. i.e. minimum 25% of the issue to be brought in, on fully dilutive basis.

Allocation in the net offer
The allocation in the net offer category shall be as follows:

	Book building Issue	Fixed price issue
Retail Individual Investors	Min. 35%	Min. 50%
Non-Institutional Investors	Min. 15%	Remaining 50% to: individual applicants other than retail individual investors; and other investors including corporate bodies or institutions, irrespective of the number of specified securities applied for;
Qualified institutional buyers	Max. 50% (5% of which shall be allocated to mutual funds)

The minimum application size: One lakh rupees per application.
The Minimum number of allottees: 50

Underwriting: 100% underwriting (minimum 15% by the Merchant Banker itself)

Market making: Compulsory market making through the stock brokers, minimum period of three years from the date of listing of the specified securities. Minimum 1.25% shares.

Monitoring agency: If the issue size, excluding the size of offer for sale by selling shareholders, exceeds one hundred crore rupees

Exception: IPO of bank or public financial institution or an insurance company

Monitored by: Credit rating agency registered with the Board
Quarterly report: The monitoring agency shall submit its report to the issuer on a quarterly basis, till hundred per cent of the proceeds of the issue have been utilised.

Response by BOD: The board of directors and the management of the issuer shall provide their comments on the findings of the monitoring agency.
Report on website as well as submit to Exchange: Within forty five days from the end of each quarter, publicly disseminate the report of the monitoring agency by uploading the same on its website as well as submitting the same to the stock exchange(s) on which its equity shares are listed.

Provisions for Anchor Investors in case of book building issue

Application value min. Two crore rupees

Portion available for anchor investor out of the portion available for allocation to qualified institutional buyers: Max. 60%

Allocation

Portion for Anchor Investor	Number of Anchor Investor
Allocation up to two crore rupees	Max 2
Allocation above two crore rupees up to twenty five crore rupees, subject to minimum allotment of one crore rupees per such investor	Min. 2, Max. 15
Allocation above twenty five crore rupees	Min. 5, max 15 and an additional 10 such investors for every additional 25 Crore

Reservation for domestic mutual funds: One-third of the anchor investor portion shall be reserved for domestic mutual funds

The bidding for anchor investors shall open one day before the issue opening date.

Allocation to anchor investors: On the day of the bidding by the anchor investors.

If the price fixed as a result of book building is higher than the price at which the allocation is made to the anchor investors: The anchor investors shall pay the additional amount.

If the price fixed as a result of book building is lower than the price at which the allocation is made to the anchor investors: No refund

Lock-in: 90 days on fifty per cent of the shares allotted to the anchor investors from the date of allotment,

and
Lock-in of 30 days on the remaining fifty per cent of the shares allotted to the anchor investors from the date of allotment.

Standardized lot size for SME Exchanges:

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:

Price Band (in Rs)	Lot Size (No of shares)
Upto 14	10000
more than 14 upto 18	8000
more than 18 upto 25	6000
more than 25 upto 35	4000
more than 35 upto 50	3000
more than 50 upto 70	2000
more than 70 upto 90	1600
more than 90 upto 120	1200
more than 120 upto 150	1000
more than 150 upto 180	800
more than 180 upto 250	600
more than 250 upto 350	400
more than 350 upto 500	300

Key Pre issue checkpoints:

Converting Proprietorship / Firm / Pvt. company to a Public Limited Company
Setting appropriate Capital Structure
Increase in Authorised Share Capital, as required based on post issue capital structure
Taking approval of Board of Directors and Shareholders of Company to approve issue of shares
Appointing 50% Independent Board (including 1 Woman Director)
Pre legal due diligence
Restructuring of financials to align with longer term vision.
Restating Financial statements for the last 3 years through Peer Reviewed Auditors (Financials shall not be older than 6 months at the time of submission of Offer Document with stock exchange)
Getting the website/logos of the Company ready if not already there

The above list is not exhaustive.

The Merchant Banker prepares the documentation for filing after:
conducting due diligence regarding the Company i.e checking the documentation including all the financial documents, material contracts, Government Approvals, Promoter details etc.
and planning the IPO structure, share issuances, and financial requirements

Application procedure:

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.

Migration to the main board: 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.

Criteria	BSE	NSE
Listing period	The applicant company is listed on SME Exchange for min. atleast 3 years.	The applicant company is listed on SME Exchange for min. atleast 3 years.
Public Shareholders	Minimum of 250 public shareholders	Minimum of 1000 public shareholders
Net-worth	Min. Net worth of Rs. 15 crores for 2 preceding full financial years.	The net worth of the company should be at least 75 crores
Earnings before Interest, Depreciation and Tax (EBITDA) and Profit After Tax (PAT)	Positive operating profit (earnings before interest, depreciation and tax) min. in any 2 out of 3 financial years and has positive Profit after tax (PAT) in the immediate preceding Financial Year of making the migration application to Exchange.	The applicant company should have positive cash accruals (Earnings before Interest, Depreciation and Tax) from operations for each of the 3 financial years preceding the migration application and has positive PAT in the immediate Financial Year of making the migration application to Exchange.
Promoters Holding	Promoter(s) shall be holding at least 20% of equity share capital of the company at the time of making application	Promoter(s) shall be holding at least 20% of equity share capital of the company at the time of making application
Paid up Capital & Market Capitalisation	Paid-up capital of more than 10 Crores and Market Capitalisation should be minimum Rs. 25 Crores	The paid-up equity capital of the applicant shall not be less than 10 crores and the capitalisation of the applicant’s equity shall not be less than 25 crores

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

a) 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;

b) the issuer has obtained an in-principle approval from the Main Board for listing of its entire specified securities on it.

https://www.bsesme.com/static/getlisted/criteriaisting.aspx?expandable=0

https://www.nseindia.com/companies-listing/raising-capital-public-issues-emerge-eligibility-criteria