All you need to know about SME IPOs

Small and Medium Enterprises, known commonly as SMEs, have become an integral part of India's socio-economic development. SMEs have a low capital cost and enable increased employment opportunities. As of 2022, over 66 lakh new enterprises have been registered across the country. SMEs are mostly private companies funded by private investors. However, you can get funds from public investors by making your SME public. Read on to know more about SME IPOs.

What is an SME IPO?

Similar to your regular Initial Public Offering (IPO), SME IPOs are IPOs issued by Small and Medium Enterprises. SMEs that obtain their funding from private investors issue IPOs when private financing can no longer meet their financial requirements. After the IPO ends, SME stocks are traded on the stock exchange. Public investors can become stakeholders in the SME by buying their shares.

SME IPO – Eligibility criteria

SMEs can issue IPOs and get listed on the exchange if they meet the following requirements:

  • The SME should be incorporated under the Companies Act, 1956.

  • The SME should have a face value (post issue paid-up capital) of up to ₹25 Crore.

  • The SME's net tangible assets should be worth ₹1.5 Crore.

  • The SME must have a track record of a minimum of three years if it was formed by converting partnership/proprietorship/LLP firms.

  • The SME should have a website.

  • The company's promoters should not change for at least a year after filing the IPO.

  • The SME should agree to trade in Demat securities.

  • The SME should enter into a contract with the depositories.

SME listing process – How it works

Let us understand the SME listing process. SMEs must hire the right professionals to tackle the mountain of paperwork and other compliance formalities for issuing an IPO. Here are the steps private SMEs must follow if they intend to go public.

  1. Appoint an underwriter

    The first step to getting the IPO process started is to appoint a merchant banker. The merchant banker, also known as an underwriter, is a professional with expertise in market expectations. Underwriters are responsible for drafting the IPO-related documents, including data about the face value, the selling price of the shares, etc. The appointed banks must conduct due diligence to ensure the data provided by the SME is accurate and without any discrepancies.

  2. Prepare the DRHP

    Before your company goes public, the potential investors prefer to access the company's information, i.e., operations and prospects. The underwriter creates a document called the Draft Red Herring Prospectus (DRHP). The DRHP allows potential investors to analyse the company's financial data and conduct a market evaluation to make informed investment decisions.

  3. Submit the DRHP

    When companies file a regular IPO, they submit the DRHP to the Securities and Exchange Board of India (SEBI). However, SMEs must submit and get the DRHP verified by the Stock Exchange.

  4. Advertise the IPO and announce the launch date

    Once the Stock Exchange approves the draft, the underwriters add the IPO opening and closing dates, IPO issue price, etc., and launch the IPO on a predetermined date. At this point in time, only the underwriters, banks, and stock exchange have information about the company's plan to go public. Therefore, the next step is advertising and marketing the new IPO to attract public investors.

  5. Launch the IPO and allot the shares

    The last step is to launch the IPO on the opening date. Investors can subscribe to a minimum lot of shares before the closing date. The allotment stage comes after the closing date, where a select number of investors are allotted the shares.

    After the IPO is officially launched in the primary market and the company allots the shares to the investors, the company becomes a public company. At this point, other investors can buy its shares in the secondary market.

Opt for HDFC Bank to fulfil all your SME needs

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Read more on what is driving the retail appetite for IPO’s by clicking here.

​​​​​​​*Terms and conditions apply. The information provided in this article is generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. HDFC Bank recognises the challenges entrepreneurs face while acquiring capital. Thus, HDFC Bank has created MyBusiness, a one-stop solution that gives you easy access to loans, digital solutions and provides you with the essential knowledge you need to run your business. With HDFC Bank MyBusiness, you can scale up, expand your operations, and nurture your business.