Retail interest in Initial Public Offers has increased in recent years. Small and Medium Enterprises are also discovering that IPOs are an excellent way to raise money to grow their business. If you are an SME and you are considering an IPO, MSMEx has experts who can guide you along the way. Now, let us see more about what are SME IPOs and what they entail.
What is an SME IPO?
SME IPOs allow small and medium size companies to raise capital from the market. SME IPOs are listed either on the BSE SME or NSE Emerge platform. Retail investors, including institutional investors, can invest in SME IPOs.
How is an SME IPO carried out?
Like IPOs listed on the regular bourses, SME IPOs also have to engage a merchant banker (also called an underwriter), who initiates the process by studying the company’s financials. The merchant banker will advise the company on how much money it can raise from the market and what would be the selling price of the shares.
Then it is time for the pre-IPO preparations like readying a capital structuring plan. After going public, the company has to publish a lot of information in the public domain with transparency, and it becomes easier with capital structuring.
Once the capital structure is prepared, the company engages market makers, bankers, and registrars. The quality of the intermediaries in these roles can make or break an IPO. These intermediaries then help the company prepare a draft red herring prospectus or DRHP.
The DRHP contains all the information known about the company’s IPO at this stage. It contains information on the company’s performance in the latest quarter and expected future performance. It also contains important information on how the company intends to move after the IPO.
Once the DRHP is ready, it is filed with BSE SME or NSE Emerge. Normal IPOs are filed with SEBI or the Securities and Exchange Board of India. Once the DRPH is approved by the stock exchange, the document is put in the public domain. While it is being reviewed, the company proceeds to price the stock. By this time, the intermediaries have a fair value of the stock and they and the company together agree on a stock price.
Next, the public issue of the stock is opened and investors can apply for the stock in pre-decided lot sizes. In the final step, the stock is listed on the stock exchange, where investors can buy and sell the stock consequently.
What category of companies can list under SME IPO?
Only limited entities with a face value of 1 crore though less than 25 crores can file an SME IPO. Companies with a face value of more than 25 crores can file for a regular IPO. The net worth of the SME must be more than 1 crore. The company must also have a website, where prospective investors can gather information about to the company. The company must also enable trading as a dematerialized security, and have a contract with depositories. Moreover, the promoters of the company must not change for a year before the company files for an IPO.
Note that there must be at least 50 allotees for the IPO to go forward (for a regular IPO, the number is 1000). Also, in SME IPOs, the application size varies between 10,000 to 15,000, whereas, in regular IPOs, it is greater than 1,00,000.
Conclusion
SME IPOs are an excellent way for small and medium size companies to collect capital. Astute investors also see the potential of these companies to grow and prosper and therefore make for exciting investments. If you are an SME and if you want to learn more about the IPO process, experts at MSMEx can assist. Contact us for more information.
