Small and Medium Enterprises (SMEs) play an important role in India’s social economic development. In FY 24, more than 1.85 lakh new companies were registered, bringing the total number of registered companies across India to over 16.6 lakh as of Jan 2024. These businesses are usually privately owned and supported by individual investors. However, SME can get funds from public investors either by private placement making the company public or both ways. This process involves a series of well-defined steps requiring careful planning, compliance, and execution.
Key Trends in SME IPOs in India
- Growing Momentum: More than 545 SMEs have successfully listed and have collectively raised more than ₹8,100 crores as of Jan 2025.
- Sector Highlights: IT, manufacturing, and engineering are leading sectors that take charge.
- Investor Mix: Retail investors usually contribute 35% and institutional investors contribute the remaining subscription.
1. Eligibility Criteria
SEBI (Securities and Exchange Board of India) has specified certain guidelines for SMEs to list on the SME platforms like NSE Emerge or BSE SME:
- The SME should be registered under the Companies Act, of 1956.
- Its post-issue paid-up capital must not exceed ₹25 Crore
- As per the latest audited financial results, net tangible assets must be at least ₹3 Crore, and the SME should have a proven operational track record of at least three years
- To list on NSE Emerge, FCFE should be positive for at least two of the last three full financial years.
- It should have 3 years of audited financial statements with an unqualified opinion from a trusted auditor.
- It should have a minimum average pre-tax profit of ₹1 crore over the last three years.
2. Build a strong IPO Team
Having the right advisors can save the SME from costly mistakes and build investor trust. An IPO isn’t a solo act; it requires experts to guide it. Here’s what the company needs:
- Merchant Banker: Lead manager who oversees the entire process, also known as underwriting.
- Auditor: The company must appoint a peer review-certified auditor to ensure credibility and the company’s financial reports meet high standards.
- Legal Advisors: Ensures compliance and looks for advisors who understand SME-specific challenges such as sector-specific regulations.
3. Conduct Due Diligence
Investors and regulators will scrutinize the business in which they will invest, so preparation should be done. Key tasks include:
- Financial Audits: Books uphold accuracy and transparency with an unqualified opinion.
- Legal Checks: Resolve outstanding disputes and compliance gaps.
- Governance Practices: Strengthening of internal processes to align with market expectations.
4. Draft the DRHP
The Draft Red Herring Prospectus (DRHP) is the company’s CV for investors. It needs to tell the story, highlight the strengths, and talk about risks too. The underwriter prepared this. Key sections include:
- Business Overview: What the company does and what is its unique value proposition?
- Financial Health: About the company’s past performance.
- Fund Utilization: How a company plans to use the raised capital.
5. Submit the DRHP
When companies file an IPO, they submit the DRHP to the SEBI. However, SMEs must submit and verify the DRHP by the Stock Exchange.
6. Advertise the IPO
Currently, only the underwriters, banks, and stock exchange have access to the information about the company’s plan to go public. The next step is to promote the IPO to attract retail and institutional investors. SMEs should host events and roadshows to present their plans to various investor groups. Media engagement is also important to reach targeted audiences and build credibility in the market.
7. Price Discovery
Pricing the IPO is an art and a science. Most SMEs opt for the book-building method and Peer valuation method, where investors bid within a price range. This approach helps the company to gauge market interest and set a realistic price that benefits both the company and investors. Broader market trends and sector-specific dynamics conditions also come into play, so companies should remain flexible and ready to adjust the pricing if needed. Feedback from institutional investors can offer valuable insights into market sentiment, helping to fine-tune the final price.
8. Filing and Approval
After the Stock Exchange approves the draft, the underwriters finalize the details such as IPO opening and closing dates, IPO issue price, etc., and then launch the IPO on a scheduled date.
9. Launch the IPO and Beyond
The last step is to launch the IPO on the predetermined date. Investors can subscribe to a minimum lot of shares before the closing date. The offer period is 3-5 days.
Once the offer period is over and the company allows the shares to the investors, the company becomes a public company. But the journey doesn’t end here. Regular compliance, investor communication, and performance transparency are vital to sustaining market confidence.
Conclusion
The SME IPO process in India might feel complex, but with the right guidance and preparation, it’s achievable. Stay informed, stay transparent, and never lose sight of your why. After all, an IPO is more than a transaction—it’s a partnership with the market to shape a brighter future for your business.
