SME IPOs

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Why Consider an SME IPO?

An SME IPO not only provides your business with access to capital but also enhances your corporate prestige, attracts and retains top talent, and increases the transparency of your operations.

By going public, SMEs can gain the financial flexibility needed to expand, innovate, and compete on a larger scale.

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SME IPO & MSME Fund Raising:-

IPO stands for Initial Public Offering. This is a process whereby a company that is privately owned and may have been run by family members, friends, or selected investors, now wants to expand its business and raise capital. It then wants to go public for the first time and sell a portion of its shares to the general public in the form of stock.

SME stands for small and medium-sized enterprises. It is a classification made by the Indian government. These companies have revenues, assets or a number of employees below a certain threshold (see below):

Criteria	Small Enterprise	Medium Enterprise
Investment in Plant and Machinery or Equipment	Not more than Rs 10 crore	Not more than Rs 50 crore
Annual Turnover	Not more than Rs 50 crore	Not more than Rs 250 crore

Small and medium enterprises raise funds to develop and expand their business. The most common ways SMEs raise funds are through debt financing, bank loans, and initial public offerings. Fundraising helps SMEs expand their business and prevents them from failing due to lack of funds.

A SME IPO is an initiative in which a small and medium-sized company decides to sell shares to the public for the first time in order to raise funds and list itself on the stock exchange. Technically, it is a public capital raising tool where the company reaches a stage where it proves to be capable of growth and wants to raise funds that contribute to a faster growth rate of the SME.

Yes, the IPO platform for SMEs (small and medium enterprises) was introduced by SEBI in 2012 to provide a separate platform for listing. The listing requirements are more relaxed and the cost is lower than a mainboard IPO. This is a useful way for SMEs to raise capital, as IPOs provide a platform for SMEs to:

• Gain credibility with the public,
• Increase their market presence, and
• Establish a long-term foundation.

The object of the issue tells investors how the company intends to use the funds raised from the public. They are stated in the offer documents. At a high level, they are divided into two parts:

1.Fresh Issue

Fresh issue is the issuance of new shares of the company and their sale to investors. The funds raised are intended for use in the company.

2.Offer for Sale (OFS)

Offer for Sale is the sale of shares by an existing promoter or investor. The company does not receive any proceeds from the OFS. All proceeds go to the selling shareholders in the amount of their pro-rata contribution for the offer for sale.

The Fresh Issue and the OFS may be used individually or in combination. Most companies intend to use the proceeds of the offering for the specified purposes for example raising fund for working capital need etc.

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Eligibility criteria for SME IPO

BSE SME IPO

• The post-issue paid up capital of the company shall be at least Rs.3 crores.
• Net worth shall be at least Atleast Rs. 1 crore for 2 preceding full financial years
• Net Tangible assets of at least Rs.3 crores as per the latest audited financial results
• The track record of applicant company seeking listing should be atleast 3 years.
• EBITDA, The company/ proprietorship concern/ registered firm/ LLP should have operating profit (earnings before interest, depreciation and tax) from operations for 2 out of 3 latest financial years preceding the application date.
• Leverage ratio of not more than 3:1. Relaxation may be granted to finance companies.
• 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
• 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.

NSE Emerge SME IPO

• Post issue paid up capital (face value) upto Rs.25 crore
• Track record of atleast 3 years
• Positive networth
• Operating profit from operations for atleast any 2 out of 3 financial years
• Technology startups - Annual Revenue : Not less than 10 Crs, and should have shown an annual growth of atleast 20% in the past one year.
• Technology startups - At least 10 % Pre – Issue Capital as on the date of filing of draft offer document held by QIB, Angel investor
• Emerge ITP - At least 5 % Pre – Issue Capital as on the date of filing of draft offer document held by QIB

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How does the SME exchange benefit the Small and Medium Enterprises (SME)

• Listing provides an opportunity to the corporates / entrepreneurs to raise capital to fund new projects / undertake expansions / diversifications and for acquisitions.
• This mode of fund raising through infusion of equity can help the Companies to raise borrowed funds at efficient rate.
• Equity financing lowers the debt burden leading to lower financing costs and healthier balance sheets for the firms.
• Listing also provides an exit route to private equity investors as well as liquidity to the ESOP-holding employees. SME Listing channelizes meaningful Schemes. Listing pre supposes good Corporate Governance which results in sustainability of the Company.
• Listing also helps generate an independent valuation of the company by the market.
• Listing raises a company's public profile with customers, suppliers, investors, financial institutions and the media.
• A listed company is typically covered in analyst reports and may also be included in one or more of indices of the stock exchanges.
• An initial listing increases a company's ability to raise further capital through various routes like preferential issue, rights issue, Qualified Institutional Placements and ADRs / GDRs / FCCBs, and in the process attract a wide and varied body of institutional and professional investors.
• Listing leads to better and timely disclosures and thus also protects the interest of the investors.
• Listing provides a continuing liquidity to the shareholders of the entity. This in turn helps broaden the shareholder base.
• Listed companies generally find that the market perception of their financial and business strength is enhanced.
• The sale of listed securities in the short term attract the capital gain tax of 20%. This makes it clear that the listing of shares on SME is very attractive.
• LTCG is basic exemption is Rs. 125000/- per annum, 10% Tax rate on LTCG is without indexation. This also makes it clear that the listing of shares on SME is very attractive.
• All Companies listed on SME Exchange can anytime migrate to the main Board of BSE/ NSE provided shareholders approval is accorded.

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IPO Pricing

The IPO price is the price at which a company's shares are first offered to the public in an initial public offering (IPO). The IPO price can be either a fixed price or a price range (book building).

1.Book Building Method

In the book-building method of issuance, the IPO price is not fixed in advance. The issuing company announces an IPO price range (e.g., Rs 75 to Rs 80 per share) within which bids for the IPO are accepted. The IPO price is determined at the end of the bidding period based on the demand for the shares at various price levels.

2.Fixed price issue method

In a fixed price issue, the offer price is fixed (e.g. Rs 75 per share) that is decided in advance before the IPO opens for the subscription. The SME companies prefer a fixed price issue over the book-building method due to the smaller issue size.

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IPO Valuation

The IPO valuation is one of the critical steps in the IPO process that helps determine the price of an IPO. An IPO valuation is a complicated task that requires expertise and in-depth knowledge of financial concepts and the market / industry as a whole. A merchant banker assists the issuing company in the valuation process.

There are several factors that affect the valuation of a company. The merchant banker must analyse all of these factors in detail. This data is then submitted to SEBI in the draft IPO prospectus, which explains the basis for determining the price. SEBI thoroughly evaluates and analyses the data to ensure that investors' money is in safe hands.

It is very important to price the stock correctly because an overvalued stock may not attract many investors and an undervalued stock may create doubts amongst investors.

The valuation of an IPO company is usually aligned with companies in the same industry. Therefore, an issuing company reviews the valuations and current market price of stocks in the same industry. If the valuations differ too much, investors tend to hesitate to invest in the company

CA. Ashwani Rastogi

india@globaltaxation.in

Comparison of Listing and Compliance Norms of SME Exchange with Main Board

Sr. No.	Particulars	Main Board	SME Platform
1	Eligibility	Minimum Post Issue Paid up capital – Rs. 10 crore	Minimum Post Issue Paid up capital – Rs. 3 crores Maximum Post Issue Paid up capital – Rs. 25 crores
2	Track Record of Distributable Profits	The must be a distributable profits in 3 out of immediately preceding 5 years, with the last year showing profits	The must be a distributable profits in 2 out of immediately preceding 3 years
3	Underwriting	Not Mandatory	100% underwritten issues. Merchant bankers are required to underwrite upto 15% on their own account
4	Market Making	Not Mandatory	Merchant bankers are required to undertake market making for a period of 3 years
5	Time Line	8-10 months	3-4 months
6	Need for SEBI Approval & fees	SEBI approval for DRHP is a preliminary condition for IPO. Fees:- Based on Issue Size Min – Rs. 25,000/- , Max – Rs. 3,00,00,000/-	SEBI approval is not required. Hence this cost is eliminated.
7	Need for Inprinciple approval of stock exchanges & fees	There is requirement to seek in-principle approval of stock exchanges where the shares are proposed to be listed post IPO. Processing Fees:- 0.05 % of issue size Min – Rs. 50,000/- , Max – Rs. 25,00,000/-	In-principle approval of stock exchanges is not required. Hence this cost is eliminated.
8	Need for Public notice	Public notice of 1 month before opening of the offer	Public notice is not required.
9	Minimum number of investors	Minimum 1000 investors	50 at the time of listing. No post listing continuous requirement of minimum number of shareholders
10	Initial Listing Fees (BSE)	Rs. 20,000/-	Rs. 50,000/-
11	Annual Listing Fees (BSE)	Based on paid up capital Min – Rs. 15,000/- Max – Rs. 62,50,000 plus Rs. 2500 for every increase of Rs. 5 crores or part thereof above Rs. 1000 crores	Rs. 25,000/- or 0.01% of full market capitalization, whichever is higher
12	Fees for using the Book Building Software	Not Applicable	Based on Issue size:- Upto Rs. 10 crores – 1 lakh Above Rs. 10 crores – 1.5 lakhs
13	Trading Lot Size	Rs.1	Rs. 1,00,000/-
14	Participation of the QIB	50% compulsory subscription by QIBs	Not Mandatory
15	Listing	Can list on both exchanges	Can list on only one exchange.
Compliance Name
14	Shareholding Pattern submission	Quarterly Basis	Half Yearly Basis
15	Financial results submission	Quarterly Basis	Half Yearly Basis
16	Publication of financial results	On Quarterly Basis, financials to be published in 1 English newspaper and 1 newspaper of regional language where the registered office of the Company is situated	No requirement of publication. Only hosting on Company’s website is sufficient

Procedure and Timeline

Sr. No.	Procedure	Expected TAT
1	Conversion of Company into Public Limited Company, if applicable	24-08-2024
2	Preparation of Documents for conversion and submission to ROC for approval i.e. Alteration of Memorandum, Articles & filing of necessary forms for appointment of aforesaid directors	29-08-2024
3	ROC approval accorded for conversion	31-08-2024
4	Identification & appointment of Registrar & Transfer Agents & Submission of Master Creation forms with NSDL, CDSL for establishing connectivity	31-08-2024
5	Appointment of Managing Director, Whole Time Director, Independent Directors, Company Secretary & deciding about their remuneration, sitting fees etc.	05-09-2024
6	Constitution of committees - Audit, Shareholder Grievance, Remuneration etc. As per SEBI Listing Obligations and Disclosure Requirements Regulations	08-09-2024
7	Preparation of website of the Company & hosting code of conduct on the website	11-09-2024
8	Signing of Tri-Partite Agreement with NSDL & CDSL and receipt of ISIN	11-09-2024
9	Identification & appointment of peer review auditors & getting the financials of last 5 years restated and for last 1 year re-audited from peer review auditors as per SEBI (ICDR) Regulations, 2009	11-09-2024
10	Appointment of Merchant Banker & Market Maker	11-09-2024
11	Preparation of Project Report and Draft Red Herring Prospectus (DRHP) / Prospectus	28-09-2024
12	Filing of Draft Red Herring Prospectus (DRHP) with stock exchange & SEBI (only for hosting)	28-09-2024
13	Visit to registered office of the Company by BSE officials and promoters interview with Listing Advisory Committee	18-10-2024
14	In Principle approval from stock exchange	28-10-2024
15	Filing of Draft Red Herring Prospectus (DRHP) with ROC & getting it cleared from ROC	02-11-2024
16	Filing of Final Prospectus with Stock exchange and SEBI	07-11-2024
17	Opening of the Issue	12-11-2024
18	Closing of the Issue	15-11-2024
19	Allotment of shares	22-11-2024
20	Filing of listing application with Stock exchange	25-11-2024
21	Receipt of listing approval from Stock exchange	27-11-2024
22	Filing of corporate action form with NSDL & CDSL and demat credit of shares	28-11-2024
23	Filing of trading application with Stock exchange	30-11-2024
24	Receipt of trading approval from Stock exchange	02-12-2024