Is Your Business Ready: Understanding SME IPOs

INTRODUCTION

The Micro Small and Medium Enterprises (MSMEs) are often termed as the backbone of the Indian Economy as they facilitate economic development and provide vast employment opportunities across every spectrum to the people. Before 2012, Small and Medium Enterprises (SMEs) could not access the Capital Markets as the Eligibility Criterions of the Stock Exchanges were very high. These exchanges required that the minimum post issue paid up capital to be INR 10 Crore and having a minimum market cap of INR 25 crores so as to be eligible to be listed on the Stock Exchanges- National Stock Exchange (NSE) and Bombay Stock Exchange (BSE). These criterions barred the access of capital markets to SMEs. But in the year 2008, SEBI (Securities and Exchange Board of India) recognizing the prominence and importance of these enterprises in the Indian Economy ,propagated the idea of dedicated exchanges for the Listing of Securities of SMEs, which led to the formation of SME Segments- BSE SME and NSE Emerge in the 2012.

LISTING REQUIREMENTS FOR SMES

For any SME to be listed on BSE SME and NSE Emerge, it has to comply with the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (LODR Regulations) and SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 (ICDR Regulations) along with additional Listing Norms as have been devised by the respective Stock Exchanges.¹ Some of the essential requirements which have to be complied by the SME company are as follows:

The Company shall be incorporated under the Companies Act of 1956/2013.
The Post Issue Paid Up Capital (face value) shall not be more than INR. 25 crores while listing in BSE SME and NSE Emerge.
The Companies shall ensure that it satisfies the previous track record norm of the respective stock exchanges and shall make adequate while filings with Auditor certified financial statements.²
The Companies existing shall be dematerialized and the proposed Securities shall be in Demat form by signing an agreement with the Depository.³
The IPO shall be 100% underwritten and the Lead Manager shall ensure to underwrite atleast 15%.⁴
The SEBI(LODR) regulations provide entities listed on SME to enjoy certain privileges and exemptions in terms of disclosure requirements pertaining to Corporate Governance⁵, shareholding pattern, financial results, website disclosures, etc. in comparison to entities listed on Main Board.

Hence, the above mentioned are some of the essential requirements which are to be fulfilled by a Company which is applying to be Listed on the respective SME exchanges. While the conditions are essential for the purposes of compliance, there are also some additional norms put forth in the SEBI regulations and Stock exchange platforms for onboarding them.

PROCEDURE FOR LISTING IN SME SEGMENT OF THE EXCHANGE

Pre-IPO preparations:
Appointment of SEBI registered Merchant Bankers-Category -1 to act as Lead Managers and Underwriters.⁶
Company in consultation with Lead Manager shall appoint other SEBI registered Intermediaries for facilitating the IPO process.⁷
Company shall pass Board and Special Resolutions as may be required for the purposes of quantum of Issue, Board restructuring, etc.
Due Diligence

Lead managers shall exercise due diligence on the veracity and adequacy of the Issue.⁸

Preparation of Offer Document⁹

Company shall file an offer document along with the Due Diligence Report, filed in accordance with SEBI regulations and Listing Norms of the Stock Exchanges. SME companies have the privilege to directly file the copy of offer document i.e., the Red Herring Prospectus (RHP) unlike companies listed on the Main Board who have to file DRHP (Draft Red Herring Prospectus) and obtain SEBI's observations.

Document Submission
All documents must be filed in consonance with ICDR regulations.
Agreement¹⁰ with Depository for Dematerialization of existing¹¹ and prospective shares.
Gaining in-principle approval from the Stock Exchange for the issue.
Filing document with RoC (Registrar of Companies) for their approval.
Pre-Issue Advertisement shall be done for the purposes of the Issue.¹²
Listing Assistance
ASBA shall be utilized to accept bids.¹³
Finalizing Basis of Allotment of Shares in consultation with Merchant Bankers and Registrar to issue & Stock Exchange in consonance with Regulation 253.
Filing of Listing Application with Stock Exchange.
Trading shall commence within 6 working days of the Issue, post receiving the approval.

THE COST OF GOING PUBLIC

The costs and expenses of going public (IPO) generally depend upon the quantum of the issue and the services availed from the intermediaries by the SME Company. The Stock Exchange charges certain Listing Fees for the Stocks listed in their SME segments. They are:

NSE Emerge

At the time of receiving In-Principle Application from the NSE, the Company shall pay a sum of INR. 25 Thousand as Processing Fees and a sum of INR. 50 Thousand or 0.01% of the Issue Size (whichever is higher) shall be paid as Initial Listing Fees at the time of the Final Listing Application. In addition to the above, the company shall deposit with the exchange a Security Deposit amounting to 1% of the Issue Size available for subscription by the Public which shall either be refunded or forfeited as decided by NSE or SEBI.¹⁴

While the above expenses are incurred only in the initial stages of the Listing procedure at the NSE, the Company is liable to pay an Annual Listing Fees which shall be applicable from the subsequent financial year post listing for a sum of 0.02% of the full market capitalization, calculated as on 31 march.

BSE SME

Unlike NSE Emerge, BSE SME charges processing fees depending upon the company's issue size. The fees would be INR. 1 Lakh in case the Issue Size is upto INR. 5 Crores while if the same is greater than INR. 5 Crores but less than or equal to INR. 25 crores, the processing fee would be upto INR. 3 Lakhs.

In addition to the above, the company shall deposit with the exchange a Security Deposit amounting to 1% of the Issue Size available for subscription by the Public which shall either be refunded or forfeited as decided by BSE or SEBI.¹⁵

While the above expenses are incurred only in the initial stages of the Listing procedure at the NSE, the Company is liable to pay an Annual Listing Fees which shall be applicable from the subsequent financial year post listing for a sum of INR. 25000 or 0.01% of the full market capitalization (whichever is higher) calculated as on 31 march.

THE SME IPO FEVER

While its been more than a decade since the inception of the SME Stock Exchanges, the past few years highlight a massive surge in the number of companies getting Listed on the exchange and raising funds. In the Financial Year (FY) 2022-23, the Stock Exchanges cumulatively witnessed a listing of 125 companies raising a whopping amount of INR. 2332 crores. The FY 2023-24 evidenced these exchanges add 196 companies under their umbrella raising a little over INR. 6000 crores, a record in the history of these exchanges. As on 15 October 2024, a little over 7 months of Current Year 2024-25, these exchanges have raised a whopping INR. 5700 crores from 159 IPOs.

Through the above it can be seen that the SME IPO market is thriving with the Investor ready to invest in a sector which contributes to a major chunk of our GDP. With the access to Capital, these Companies are able to charter their growth and sustain in the market while providing huge returns to its customers.

PRECAUTIONS TO BE TAKEN WHILE LISTING

While the Listing Procedure for SMEs to access the Capital markets have been simplified, the Companies have to ensure taking certain precautions while filing their application to SEBI and the Stock Exchanges. The compliance with Listing Norms of the exchange along with SEBI regulations is essential for the same. The track records as stated by the Stock Exchanges must have been explicitly complied with by the Company before applying. The existing securities must be in demat form. There shall be no winding up petitions which are pending before the court or any reference made under the Insolvency Bankruptcy Code (IBC) to the National Company Law Tribunal (NCLT). The NSE Emerge additionally states that there shall be no material regulatory or disciplinary action taken by a Stock Exchange or any other regulatory authority in the past three years against the company applying for Listing.

It is pertinent to take such care and precautions because once the application of a company is rejected, the Capital markets would become inaccessible to the Company for a period of 6 months.

Conclusion

The SME stock exchanges have had a huge impact on the growth of the SME sector. The privileges and exemptions enjoyed by the Sector help in their promotion and development. They help making the capital markets accessible to these enterprises which are thirsty for Capital. Regulation of these enterprises brings in transparency easing the worry of the investors contributing to their capital. Also, the returns achieved by them have been multifold making it an eye-candy for investors. The SEBI and the Stock Exchanges have made the process of listing SME companies very simplified thereby promoting their development and acting as a catalyst for India's economic growth- driving innovation, job creation and overall prosperity.

Footnotes

1. Regulation 229(3) of the SEBI (ICDR) Regulations, 2018.

2. Regulation 229 of the SEBI (ICDR) Regulations, 2018.

3. Regulation 230 of the SEBI (ICDR) Regulations, 2018.

4. Regulation 260 (1) and (2) of the SEBI (ICDR) Regulations, 2018.

5. Regulation 15(2) of the SEBI (LODR) Regulations, 2015.

6. Regulation 244,260 of the SEBI (ICDR) Regulations, 2018.

7. Regulation 244 of the SEBI (ICDR) Regulations, 2018.

8. Regulation 245 of the SEBI (ICDR) Regulations 2018.

9. Regulation 246 of the SEBI(ICDR) Regulations, 2018.

10. Regulation 230(b) of the SEBI(ICDR) Regulations, 2018.

11. Regulation 230(d) of the SEBI(ICDR) Regulations, 2018.

12. Regulation 264 of the SEBI(ICDR) Regulations, 2018.

13. Regulation 256 of the SEBI(ICDR) Regulations, 2018.

14. Regulation 259 of the SEBI (ICDR) Regulations, 2018.

15. Regulation 259 of the SEBI (ICDR) Regulations, 2018.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.