All about SME IPO and how it works

What is an SME IPO?

An SME IPO: What is it? India currently has a startup “culture” with new businesses sprouting up since the Indian government encouraged Indian entrepreneurs to take off. If you want to invest in their shares, these might develop into promising business opportunities in the future. Such startups frequently make their formerly privately held stock available to the public once they have the potential for additional growth and development. After that, the stock is listed for public trading on the stock exchange.

Companies conduct initial public offerings, or IPOs when they accomplish this and make stock available to the general public. Large organizations that have had significant expansion typically offer IPOs. But SMEs, or small and medium-sized enterprises, might also launch an SME IPO.  Keep up with the newest IPOs scheduled for 2023!

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What is an SME IPO?

You are aware that in order to invest in the Indian stock market, a demat account must be opened. This enables electronic stock holding and makes trading easier. However, investing in an IPO differs from merely purchasing stock on the stock market. An SME IPO is the procedure by which small and medium-sized businesses issue their stock to the general public. So an SME IPO is when a small or medium-sized business offers the general public the chance to purchase its shares, primarily in order to raise money for future growth or expansion. 

The fundamental differences between an “IPO” and an “SME IPO” relate to the size of the firm that launches the IPO, if you’re wondering whether there is any difference between them. Large organizations that are already somewhat established and desire to expand more frequently launch a traditional IPO. This is the primary distinction between an SME IPO and a standard IPO that you might notice. Other variations typically have to do with the goals, listings, exchanges, processes, and listing requirements of such companies.

Small and Medium Business IPO Requirements:

Additionally, you should be aware that SME IPO is short for “Small and Medium Enterprise IPO.” Any upcoming IPO you come across can be the standard variety, produced by a rather old company. These IPOs are subject to strict rules that they must follow. Small and medium-sized businesses, on the other hand, are subject to fewer restrictions and go through an easier listing process. 

‘The Process – How an SME IPO Works:

The following describes the procedure for listing a SME IPO: 

  • An SME must first appoint a merchant banker before the IPO process can begin. The banker, often referred to as an underwriter, has the responsibility of determining the SME’s financial standing and the amount of cash that will be raised by the upcoming IPO. The establishment of a capital structure follows the requirement for future public disclosure of pertinent financial data pertaining to the SME. 
  • The hiring of personnel, including registrars and others, follows in order to see the IPO through to completion. 
  • Hence comes the creation of the Draft Red Herring Prospectus (DRHP). The SME’s mission statement and details about potential futures are included in this, which is virtually comparable to what is done with a traditional IPO. The pertinent exchange performs an evaluation of this.
  • If all goes according to plan, the DRHP is approved and released to the public. 
  • The price of the stock and the IPO date are chosen by the company. 

Why Small and Medium-Sized Businesses (SMEs) Go Public:

Small and medium-sized businesses (SMEs) support India’s economy and GDP on the whole. The government has given these companies a boost to grow because it recognizes that small and medium-sized businesses must be supported to strengthen India’s overall economy. As a result, the Securities and Exchange Board of India (SEBI) invented the term “SME IPO,” whereby small businesses are given numerous relaxations and conveniences to raise funds in a straightforward method.

The goal is to concentrate on businesses who, while having a potentially low net worth or level of profitability, want to enter the capital markets and have access to trading opportunities on the BSE SME and NSE EMERGE platforms. These are two NSE (National Stock Exchange) and BSE (Bombay Stock Exchange) subsidiary exchanges, focused on the listing of shares of SMEs, respectively. 

A Regular IPO v/s a SME IPO:

Given that you now understand what an SME IPO is, you’ve probably already made an assessment of the distinctions between an SME IPO and a standard IPO. However, the following distinctions are listed: 

  • When it comes to the validation of the initial public offering (IPO), SEBI handles normal IPOs while exchanges handle SME IPOs. Because of this, SMEs may get clearances more quickly and launch projects more quickly.
  • The size of the company is important because an SME IPO requires a minimum post-paid capital of Rs. 1 crore. This is at least Rs. 10 crores for a typical IPO. This provides a foundation for further expansion and encourages SME enterprises to expand their operations within India. 
  • The Allottees – A conventional IPO must have a minimum of 1,000 allottees. The figure is 500 for an IPO of a SME. 
  • The Size of the Application: In an SME IPO, the application must be one lakh rupees in size, whereas in a standard IPO, it must be between 10,000 and 15,000 rupees. 

Grow With an SME:

If you are confident that a company is on a clear path to growth, then any prospective IPO is worthwhile. When opening a Demat account to invest in direct equities, keep this in mind. While direct equity is excellent and will provide you with solid long-term benefits, IPOs allow you the opportunity to increase your wealth in tandem with a company’s overall growth. You should invest now because big businesses today were once SMEs.