An initial public offering (IPO) is the public sale of a company's shares followed by their listing on a stock exchange. Through the issuance of new shares to public investors, a company can raise capital to build and expand its operations. There are numerous situations in which companies begin to consider an IPO as one of their strategic options. Funding, growth, internationalization, and changes in industry landscapes are all potential triggers for strategic considerations when pursuing an IPO.
SME IPO
A small and medium sized enterprise (SME) IPO is essentially an Initial Public Offering (IPO) tailored to small and medium-sized businesses. These are businesses that have not yet established themselves as large corporations but are still looking to raise capital by selling stock to the general public. One of the primary distinctions between an SME IPO and a regular IPO is the size of the offering. SME IPOs typically raise less money than regular IPOs. This makes it more accessible to small businesses that do not require or wish to raise a large size of funding.
Key Conditions to list SMEs in the SME Exchange
To list on the SME Exchange, SMEs must meet several key conditions. Firstly, SMEs must be registered under the Companies Act 2013 and have a positive net worth. Additionally, they must possess net tangible assets of at least INR 1.25 crore and demonstrate a track record of at least three years.
Furthermore, SMEs seeking listing must exhibit positive cash accruals (earnings before depreciation and tax) in any of the years out of the last three years and have an operational website. Moreover, they must engage in trading in dematerialized securities and ensure that the promoters of the company have remained unchanged in the preceding year. These conditions serve as fundamental requirements for SMEs aiming to list on the SME Exchange.
Benefits of Listing under SME Board
Outperforming companies weigh the benefits of going public against the drawbacks, as well as against the company’s and shareholders’ objectives. Benefits of Listing under SME Board:
- Efficient access to capital markets to raise money through equity offerings with better future financing opportunities.
- Flexibility to trade shares with high liquidity and daily valuation.
- Shares functioning as new liquid M&A currency.
- Greater attention, better brand recognition and prestige with customers and suppliers.
- Ability to benchmark operations against other public companies within the same industry.
- Potential to diversify wealth on the shareholder side.
- Enhanced ability to attract, retain and reward valued employees as a listed company.
SME Exchange
"SME Exchange" is defined in Chapter XB of the Securities and Exchange Board of India (Issue of Capital And Disclosure Requirements) Regulations as a trading platform of a recognized stock exchange or a dedicated exchange permitted by SEBI to list the securities issued in accordance with Chapter XA of SEBI (ICDR) Regulations, and this excludes the Main Board.
An SME Exchange is a stock exchange dedicated to trading the shares and securities of SMEs that would otherwise be difficult to list on the Main Board. Currently, India has only two SME Exchanges: the BSE SME Platform (BSE) and the EMERGE Platform (NSE).
Procedure
1. Listing Requirements
The requirements for entities to be listed on the SME Exchange are mentioned below:
- The SME must be a limited company.
- They must have a post-issue face value capital between INR 1 to 25 crores depending on the amount to be raised.
- SME’s net tangible assets must be at least INR 1.25 crore, as per the latest audited financial statements.
- As per the latest audited financial statements, the net worth must be at least INR 1 crore (excluding revaluation reserve.)
- In terms of the Companies Act, 2013, the entity must have a track record of distributable profits for at least two out of the three immediately preceding years. If not, it must have a net worth of at least INR 3 crores.
- The company must have a website.
- Entity must compulsorily enable trading in DEMAT securities and get into agreements with both the Depositories – Central Depository Services Limited and National Securities Depository Limited.
- The entity should not have any reference before the Board for Industrial and Financial Reconstruction (BIFR).
- All issues must be 100% underwritten. Merchant bankers must underwrite 15% of their accounts.
- Entities must have at least 50 investors while listing through IPO.
2. Due Diligence
Conduct due diligence regarding the Company and review all the documents, including financial documents, Government Approvals, material contracts, etc. and prepare adequate documentation required for the IPO.
3. Appointment of the Merchant Banker
The company is required to appoint a Merchant banker to be involved in the underwriting of the shares to the exchange.
4. Prospectus and Agreements
The company is required to prepare the draft prospectus and Draft Red Herring Prospectus (DRHP) which will be submitted to SEBI and exchanged for approval. The application is to be submitted along with the plan of investment, project, utilizations and agreements such as underwriter, merchant banker, investment, shareholders etc.
5. Application to BSE SME Exchange or NSE Emerge
The company is required to submit the draft prospectus and Draft Red Herring Prospectus (DRHP) to the SEBI and exchange. Once the authorities are satisfied with the documents, grant an approval to list in the specified exchange.
6. Launch of IPO
The IPO will open and close according to the planned schedule. After the IPO closes, the company must submit all of the documents on the checklist to the BSE SME Exchange or NSE Emerge to finalize the basis of allotment. Once that is completed, BSE or NSE Emerge will issue a notice regarding listing and trading.
Post Listing Requirements
1. Holding of specified Securities and Shareholding Pattern
Entities that have listed their securities on the SME Exchange must submit a statement to the stock exchange detailing their holdings and shareholding patterns for each class of security.
2. Financial Results
Unlike the quarterly submission requirement for companies on the Main Board of Exchanges, entities listed on the SME Exchange are expected to submit financial results to the stock exchange within 45 days of each half-year.
3. Newspaper Advertisements
Companies that have listed their specified securities on SME Exchange shall not have to comply with the requirements of this regulation.
Conclusion
The process of listing SMEs on the SME Exchange involves meeting specific criteria, conducting thorough due diligence, and adhering to regulatory requirements. Despite the rigorous procedure, listing on the SME Exchange offers numerous benefits, including access to capital markets, enhanced liquidity, brand recognition, and the ability to attract top talent. By understanding the listing requirements, procedural steps, and post-listing obligations, SMEs can leverage the opportunities provided by the SME Exchange to fuel growth and expansion.
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