What Is SME IPO - Meaning, Eligibility, and How to Apply

India’s small and medium enterprises (SMEs) have long been the backbone of the economy. Known for their innovation, resilience, and untapped potential, these businesses are no longer confined to local markets. Today, they are stepping into the spotlight, capturing investor interest, and opening doors to bigger opportunities.

This shift has sparked a new wave of market participation, where growing businesses are exploring structured ways to raise capital, and SME IPOs are one of them. These offerings not only enhance a company’s visibility but also fast-track its expansion plans.

In this article, we’ll break down what is SME IPO, its key features, eligibility criteria, and how you can apply. So let’s dive in!

What Is SME IPO

Let’s start with the SME IPO full form, which stands for Small and Medium Enterprises Initial Public Offering. Now that you know this, let’s understand what it means.

SME IPO is a process through which small and medium-sized companies raise capital by offering their shares to the public for the first time. This is adopted when the lending, bank mortgages, or other sources of funding are not enough for the needed growth. 

While regular IPOs are for all, these are for a specific category of companies only. The idea is to help these businesses gain access to public funding with simpler regulatory requirements. SME IPOs are listed and traded on two dedicated stock exchanges - BSE SME and NSE Emerge.

SME IPOs help these companies expand, improve operations, and increase visibility. This allows public investors to become stakeholders in these smaller companies and explore amazing investment opportunities. This way, it becomes a win-win situation for companies and investors. 

Features of SME IPO

There is no doubt that an SME IPO will help upcoming businesses raise capital for their running needs. But SME IPOs have various other features that make them stand out from the rest. So, below are the key pointers that make SME IPO unique:

• Lower Entry Barriers: SME IPOs are known for their easy rules. There are no hard conditions to be fulfilled. These are launched with low paid-up capital, and turnover is quite low. This helps these small and medium companies to raise funds and boost their business easily. 

• Access to Capital: When you launch an IPO, you can raise funds from various investors in no time. These funds can be used for expansion and meeting other business needs. You can do research work, development projects, and others using these funds. You can use the funds for debt reduction and working capital needs without incurring debt.

• Enhanced Visibility and Credibility: Every business needs visibility and reach. With this IPO, SMEs get a platform where people can witness their work. This will help you build a brand image that stands out. This will attract new clients, partners, and investors in the long run.

• Liquidity for Shareholders: SME IPOs provide liquidity to existing shareholders, including promoters and early investors. When an IPO occurs, these shareholders have the opportunity to sell their stocks and enabling them to earn returns on their investments.

• Improved Corporate Governance: Listing requires adherence to stricter disclosure norms and governance standards, which enhances transparency and investor confidence.

• Mandatory Market Making: To ensure liquidity, SME IPOs require market makers to support trading for a specified period, typically three years.

These features collectively make SME IPO a valuable tool for smaller companies to access public markets and grow their business efficiently.

SME IPO Eligibility Criteria

The SME IPO eligibility is quite simple. A company needs to fulfill certain basic requirements, and once done, it can plan out the SME IPO. The basic eligibility conditions to be fulfilled are as follows:

• Registration under the Companies Act, 1956 or 2013 of India is a necessity.

• The post-issue paid-up capital of the company should not exceed Rs 25 crores.

• The company must have been working for the last 3 years with a good performance history.

• It must have a positive net worth in at least two out of the last three financial years.

• The company should have operating profits (earnings before interest, depreciation, and tax) in at least two of the last three financial years, with the latest year being profitable.

• The promoters should have held their shares for at least one year prior to the application.

• There should be no winding-up petition or insolvency proceedings pending against the company.

• Remember, the company must never be reported or suggested to the Board for Industrial and Financial Reconstruction (BIFR).

• The company must support Demat securities trading and have agreements with depositories like NSDL and CDSL.

• Generally, Rs 1,00,000 is the minimum amount that investors must put in.

• There should be a minimum of 50 investors listed once the issue is completed.

• Underwriting of the issue is a must. The merchant banker must also underwrite a minimum of 15%.

• The company should not have any pending defaults on payment of interest or principal to debenture holders or fixed deposit holders.

• The leverage ratio (debt to equity) should not exceed 3:1, except for finance companies, which may have relaxations.

These criteria ensure that only financially stable and operationally sound SMEs can raise capital through SME IPOs on platforms like BSE SME and NSE Emerge.

How SME IPO Works

Now that you understand what is SME IPO, the next question is, how does it actually work? To fully grasp the process, it’s important to know the key steps involved, from proposing the IPO to getting the shares listed and traded. 

The steps that are followed to make the SME IPO work are as follows:

1. Planning Stage

It starts with understanding what is needed. Is the market ready for IPO? Can you gain good funds? The board of directors approves the IPO plan and appoints a merchant banker (underwriter) along with other intermediaries such as auditors, registrars, bankers, and market makers. Valuations and capital are planned here.

2. Due Diligence and Documentation

Once done, it's time to check if everything is in line. This is where you would need a merchant banker. A details company analysis will take place. This will involve the analysis of financial statements, business operations, and legal compliance.

The Draft Red Herring Prospectus (DRHP) is prepared. The main details that will be in this document are:

• The details of the company

• Business model

• Financial information and risk statement

• Aim for raising funds

• Any detail deemed necessary for IPO filing.

3. Submission and Approval of DRHP

Unlike mainboard IPOs, where the DRHP is submitted to SEBI, SME companies submit the DRHP to the stock exchange (such as BSE SME or NSE Emerge). The exchange reviews the document, conducts site visits, and interviews the promoters. Once everything is fine, the approval is provided. 

4. Filing of Red Herring Prospectus (RHP)

After receiving in-principle approval, the company files the Red Herring Prospectus (RHP) with the stock exchange and the Registrar of Companies (ROC). The RHP includes finalized details such as the issue price, opening and closing dates of the IPO, and other relevant disclosures.

5. Marketing and Advertising

The company and its merchant banker promote the IPO to attract investors. This may involve advertising campaigns, roadshows, and investor meetings to generate interest and explain the company’s growth prospects.

6. IPO Launch and Subscription

The IPO opens on the scheduled date, allowing investors to apply for shares in minimum lot sizes. The subscription period typically lasts a few days, during which investors submit their applications through brokers or online platforms.

7. Allotment of Shares

Once the subscription period closes, shares are allotted to investors based on the basis of allotment determined by the company and the merchant banker. If you do not get allotment, then the refund will be processed.

8. Listing and Trading

You are now going for the final listing. Once listed, people will start placing bids for allotment and trading. To ensure liquidity, market-making is mandatory for at least three years following the listing.

This structured process usually takes around 3 to 4 months and helps SMEs raise capital efficiently while providing investors with opportunities to invest in growing businesses.

SME IPO vs Normal IPO - Key Differences

Till now, you have explored all the basic details linked to the SME IPO. But are IPO and SME IPO the same? Well, though they might look quite similar in nature, there are certain differences between SME IPO vs normal IPO. 

Impact of SME IPO

SME IPOs have become an important avenue for small and medium enterprises to raise capital from the public, enabling them to grow and compete more effectively. By listing on specialized SME platforms like BSE SME and NSE Emerge, these companies gain access to funds that help expand operations, invest in innovation, and improve market reach.

The key impacts of the SME IPOs are as follows:

• Access to Growth Capital

SME IPOs provide companies with a vital source of equity capital, reducing reliance on debt and enabling investments in technology, infrastructure, and new markets.

• Improved Visibility and Credibility

Being listed enhances a company’s reputation, attracting customers, suppliers, and partners, while also enforcing better corporate governance and transparency.

• Liquidity for Shareholders

Promoters and early investors gain an opportunity to sell shares in the public market. This helps them to unlock their value and generate wealth.

• Investment Opportunities and Diversification

Investors can participate in the growth story of emerging companies, diversifying their portfolios beyond large-cap stocks and potentially earning higher returns.

• Economic Development and Job Creation

SMEs are key drivers of employment and innovation. This also helps in scaling businesses, which is important for growth, the economy, and even employment generation.

• Challenges and Regulatory Improvements

SME IPOs have various issues linked to liquidity and coverage. Regulatory bodies such as SEBI have introduced measures to enhance transparency, enforce profitability norms, and protect investors, strengthening the ecosystem.

Advatages and Disvantages of Investing in SME IPO

SME IPOs are crucial for growing small businesses. But unlike any other IPO, there are pros and cons to investing in an SME IPO. Read to find all you need here to make the right decision.

Advantages of Investing in SME IPOs

• Early Access to Growth Companies: This offers investors an opportunity to invest in new, small, and medium-sized companies. These are usually at the starting point and so can offer better growth in the future. Hence, higher returns can be expected.

• Diversification: Investing in large companies is good, but you need a better approach. This is what diversification is all about. Investing in SME IPOs allows diversification and helps in spreading risk across different market segments.

• Support for Entrepreneurship: When you invest in SME, you are supporting entrepreneurs. This will help in growth, job creation, and the introduction of innovative ideas never thought of before. 

• Potential for High Returns: Many times, these companies perform better than already established ones. They have a larger scope and playing field. This helps in better earnings.

• Liquidity for Shareholders: Promoters and seed investors can sell their shares once the company is listed. This helps them gain their money back and generate wealth. Further, they can invest in other SMEs to help achieve better growth.

• Improved Corporate Governance and Visibility: When a company is listed, there is transparency in its operations. Governance also improves which ensure that a good image for the company is developed.

• Lower Debt Burden for Companies: Funds raised through SME IPOs reduce companies’ reliance on debt, improving financial health.

Disadvantages of Investing in SME IPOs

• Higher Risk and Volatility: SMEs generally have shorter track records and limited financial stability, making their shares more volatile and riskier than those of established companies.

• Illiquidity: SME shares often have lower trading volumes, which can make buying or selling shares difficult and may trap investors in illiquid positions.

• Limited Analyst Coverage: SME IPOs receive less media and analyst attention, making it harder for investors to access reliable information and conduct thorough research.

• Higher Minimum Investment: The minimum application size for SME IPOs is usually higher (around Rs 1 lakh), which may be a barrier for small retail investors.

• Governance Concerns: Some SME companies have experienced promoter dominance, related-party transactions, and fund diversion, which raises concerns about corporate governance and transparency.

• Regulatory and Compliance Costs: SMEs face increased regulatory requirements post-listing, which can be costly and burdensome for smaller companies.

• Potential for Price Manipulation: Due to lower liquidity and limited oversight, SME shares may be more susceptible to price manipulation and volatility.

SME IPO Rules for Investors

SME IPO selling rules are not just for the companies but also for the investors. These define the dos and don'ts of SME IPo trading. So, here are certain rules that you must know if you are planning to invest in SME IPO:

• Selling Shares in Lots

Investors must sell SME shares in multiples of the trading lot size allotted during the IPO. Partial or individual share selling is not permitted; the entire lot or multiples thereof must be sold at once on the exchange where the shares are listed.

• Exchange-Specific Trading

SME shares can only be sold on the stock exchange where they are listed, such as BSE SME or NSE Emerge. Investors cannot sell shares listed on one exchange through another exchange.

• No Lock-in for Investors (Except Promoters)

Retail and non-promoter investors can sell their shares immediately after listing without any lock-in restrictions. However, promoters have a mandatory lock-in period of three years, with phased release of excess shares after one and two years.

• Offer for Sale (OFS) Limits

Individual shareholders, including promoters, are restricted in how much they can sell during the IPO. Promoters can sell up to 20% of their holdings via OFS, and individual shareholders cannot sell more than 50% of their holdings during the IPO.

• Liquidity Considerations

SME shares have low liquidity as compared to the rest. Investors should be prepared for potentially limited trading volumes and price volatility when selling SME shares post-listing.

• Listing Day Selling

Investors can sell their SME IPO shares on the listing day itself once shares are credited to their Demat accounts, subject to the lot size and exchange rules.

How to Invest in SME IPO

Here is the step-by-step guide to investing in an SME IPO:

Step 1: Research and Select the SME IPO

Start by identifying upcoming SME IPOs through stock exchange websites (BSE SME, NSE Emerge) or financial news portals. Study the company’s financials, business model, industry prospects, and risk factors to ensure the investment aligns with your goals.

Step 2: Open a Demat and Trading Account

This is quite important. The demat account is a must to hold your shares in an electronic format. You will also need a trading account to buy and sell shares on the stock exchange. If you don’t have these yet, it's time to open a demat account with a registered broker to get started.

Step 3: Apply for the IPO

When the SME IPO opens, apply through your broker’s platform or your bank’s IPO application facility. You will need to specify the number of lots (minimum two lots usually) you want to subscribe to. Payment is typically made via UPI or net banking, where funds are blocked until allotment.

Step 4: Allotment and Listing

Once done, the allotment starts. People who get the shares allotted will be able to check them in their demat account. If not allotted, you will get the amount refunded to your account. 

Step 5: Post-Listing Trading

Once listed, you can buy or sell SME shares on the exchange where they are listed (BSE SME or NSE Emerge). Note that liquidity may be lower than mainboard stocks.

This process usually takes 3 to 4 months from planning to listing, and SME IPOs offer investors early access to growing companies with the potential for high returns but also higher risks.

Conclusion 

SME IPOs present a valuable opportunity for small and medium enterprises to raise capital, enhance credibility, and fuel growth. They also offer a great chance for small companies to rise up. 

At the same time, SME IPOs offer investors a chance to invest early in growing companies with strong potential. Though the risk is high and liquidity is limited, these are great choices. So, if you are looking to invest in an SME IPO, open your demat account today. Visit Rupeezy for further details and get your journey to profitability started.  

FAQs

Q1. Is SME IPO safe for investors?

Yes, SME IPO are safe for investors. These are regulated by SEBI and are listed on stock exchanges. Though they carry a bit higher risk, these are good options if you are looking for long-term profitability.

Q2. How to sell SME IPO shares?

SME IPO shares are bought and sold just like any other shares. The difference is just that these are listed on the BSE SME or NSE Emerge. Once listing is done, primary investors can sell their shares. There is no lock-in period of any sort.

Q3. What is the minimum investment for an SME IPO?

The minimum application size is usually two lots. The amount for the application is often around Rs 1-2 lakh. This makes SME IPOs accessible mainly to serious or high-net-worth investors.

Q4. Can we sell SME IPO on the listing day?

Yes, as soon as the listing is done and the allotment is complete, the investors can sell their shares. So, it can be on the same day or a couple of days later.

Q5. How to get SME IPO allotment?

Apply through your Demat and trading account during the IPO subscription window. Allotment is done proportionally based on demand and minimum lot size, with results declared after the issue closes.

Q6. How to increase the chances of SME IPO allotment?

Apply for multiple lots (minimum two), submit applications through multiple Demat accounts if possible, and apply early during the subscription period to improve allotment chances.