Introduction to SME IPOs in India

Understanding SME IPOs

Key Features of SME IPOs

1. Relaxed Eligibility Criteria: SMEs must have a net tangible asset of at least ₹3 crores, a net worth of ₹1 crore, and an average operating profit of ₹15 crores. A minimum operational track record of three years with positive financial indicators is required.
2. Lot Size: The minimum lot size for SME IPOs ranges from 100 to 10,000, as per SEBI guidelines.
3. Other Prerequisites: Companies, directors, promoters, or investors should not be subject to disciplinary actions. Promoters are required to hold at least 20% of equity capital post the IPO.

SME IPO Listing Process

1. Appointment of Merchant Banker: The company appoints a merchant banker to manage the IPO professionally.
2. Data Compilation: The merchant banker conducts compliance and due diligence activities, compiling financial and corporate governance data.
3. Prospectus Preparation: A detailed prospectus, encompassing financials, business details, strengths, risks, and IPO information, is prepared.
4. SEBI Approval: The prospectus is filed with SEBI and the stock exchange for verification and approval.
5. Subscription Period: Upon in-principle approval, the company opens its issue for subscription, meeting laid-out conditions.
6. Share Allotment: After the subscription period, eligible investors are allotted shares.
7. Listing: A few days post-allotment, the company's shares are listed on the exchange for trading.

NSE SME IPO Eligibility

• The company should be registered in India under the Companies Act 

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

• The company should have a track record of at least three years.

• The company should have positive net worth in at least two out of three financial years.

• The National Company Law Tribunal (NCLT) or a court should not have filed a winding up petition in respect of the company.

• The issuer should provide a certificate stating that the company has not been referred to the Industrial and Financial Reconstruction Board (BIFR).

• The issuer and the promoting companies have not been subject to any proceedings under the Insolvency and Bankruptcy Code.

• The issuer / promoter / directors / promoter group / selling shareholder should not be excluded from accessing the capital market by the Board.

• The promoters / directors / founders / investors should not be classified as fugitives or delinquents under the Fugitive Business Offenders Act 2018.

• Directors should provide documentation if they are under investigation or criminal proceedings.

• Articles of incorporation should not contain restrictive clauses.

• Disciplinary proceedings in the past three years.

• Have failed to pay interest or principal on bonds / fixed deposits and banks.

• Litigation. In which case they must provide documentation of litigation, the nature of the litigation, and the status of the litigation.

• The minimum application and trading lot size is Rs 1,00,000.

• Minimum number of allottees in an SME IPO should be 50.

• IPO underwriting is mandatory, of which 15% should be underwritten by a merchant banker.

• Market maker is mandatory.

BSE SME IPO Eligibility

• The issuer should be registered under the Companies Act, 1956.

• Post issue paid up capital should not exceed Rs. 25 crores.

• Net worth should be at least Rs. 1 crore for 2 preceding full financial years. If the applicant company is the result of conversion of partnership firm, proprietorship or LLP, then the previous firm should have the required net worth of Rs 1 crore for 2 preceding financial years.

• Net Tangible Assets should be Rs 3 crores in the preceding financial year.

• A company should be in operation for at least three years. If the company has been in operation for less than three years, the project for which IPO is being proposed should be appraised and funded by NABARD, SIDBI, Banks (other than co-operative banks), Financial Institutions.

• If a company is converted into a corporation, it must have a positive cash balance (profit before depreciation and taxes). This should be the case for at least one year (of the last three years).

• The company must also have positive net assets.

• The company should have a functioning website.

• The company should support Demat securities trading. It must have an agreement with NSDL and CDSL custodians.

• The company should ensure that the promoters have not changed in the last one year since the submission of the BSE application for listing in the SME sector.

• The issuer should provide a certificate stating that the company has not been referred to the Industrial and Financial Reconstruction Board (BIFR).

• There should not be a winding petition against the company.

• The minimum size for the application and trading lot is Rs 1,00,000. The minimum number of shareholders should be 50.

• Underwriting is mandatory. 15% of it should be underwritten by a merchant banker.

• The company should have operating profit (i.e. Earnings before Interest, depreciation and tax) for 2 out of 3 latest financial years, of which the latest financial year should be mandatorily profitable. If the IPO project is funded by NABARD, SIDBI, Banks (other than cooperative banks), the company should have positive operating profit in the one last financial year.

• The leverage ratio of the company should not be more than 3:1 except for finance companies which may have certain relaxation.

• There should not be any regulatory action of suspension of trading against any promoters or companies promoted by promoters.

• The company directors and promoters should not be the promoters or directors (other than independent directors) of the compulsory delisted companies or suspended from trading on account of non-compliance.

• The company director should not be debarred or disqualified by any of the regulatory authorities.

• There should be 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), or subsidiary companies.

• In case of name change of the company in the last 1 year, 50% of the revenue for preceding full FY should be earned from the activity indicated by the new name. The revenue calculated should be based on a restated and consolidated basis.

• An SME company can choose between the NSE Emerge or BSE SME platform to go public. The Merchant Banker helps the companies to choose one of the two platforms.

• The Merchant Banker assists the issuer in compiling the required documents and information for filing an IPO application with the stock exchanges.

• The Merchant Banker contacts the exchange if there is a need for clarification on the admission criteria.

In conclusion