Eligibility criteria for SME IPO in India

Small and Medium Enterprises or SMEs play an integral part in the socio-economic development of India. As of 2022, there are approximately 75 million SMEs in the country, and it is estimated to grow to 95 million in the next few years (Source: The Economic Times, Dec, 2022). Mostly private owned companies, SMEs are funded by private investors. The biggest challenge for most SME is capital. However, SMEs can also generate funds from public investors by going public. This brings to the topic of IPOs. There has been a steady launch of Initial Public Offering (IPOs) in India in the recent years. Let us understand what SME IPO is in the Indian context, its benefits, SME eligibility and more.

What is SME IPO?

IPO or initial public offering is a way for a company to raise funds publicly in exchange of equity shares in the business.

Every business need capital for growth and expansion. There are business loans and equity financing, and other fundraising methods that can be availed for finance. To achieve the latter, the business leverages an IPO where the owners sell some portion of their ownership to investors. Like large businesses, small and medium businesses can also raise funds through an IPO. SME IPOs refer to IPOs issued by Small and Medium Enterprises. These IPOs are smaller in issue size as compared to a regular company. Due to their size, SMEs are not listed directly on the Bombay Stock Exchange or the National Stock Exchange.

Also Read: NSE SME IPO – Application process to get business listed

So, where are the SME IPOs listed? In 2012, the NSE and the BSE collectively opened exchanges to facilitate SME IPO listings. The two exchanges are:

• BSE SME platform by the Bombay Stock Exchange
• NSE EMERGE by the National Stock Exchange

The details of listing criteria for SME IPOs are given below:

1	Public shareholding	25% (Minimum)
2	Minimum trading lot	₹1 lakh
3	Minimum subscribers in IPO	50 members
4	Underwriting	100% compulsory
5	Market making	Minimum 3 years
6	Offer document	Not subject to SEBI observation

In this blog, we shall discuss the benefits and eligibility criteria for SME listing and the SME IPO rules for investors.

What are the benefits of listing on the stock exchange platforms?

Some of the important benefits that SMEs enjoy when they list their stock on the stock exchange platforms include:

• Better funding opportunities: IPOs help SMEs with equity financing opportunities to help grow their business and lowers the debt burden.
• Enhance visibility: An IPO lends certain credibility to the company with greater public awareness gained through media coverage, coverage of stock by sector investment analysts, publicly filed documents etc.
• Better risk management: Stock exchange listing helps SMEs in distributing the risk of business efficiency and facilitates to broaden the investors’ base.
• Participation from private equity investors: Being listed on the stock exchange platforms lead to increased participation from private equity investors as IPOs not just offers the investors flexibility for entry and exit, but also the confidence required for any such transactions.
• Brand building: Lastly, IPO helps to enhance visibility and build a strong national and global brand. Such brand building is otherwise difficult for most SMEs.

What are the eligibility criteria for SME IPO?

Just like how small business loans have eligibility criteria that borrowers need to meet, similarly IPOs have eligibility criteria to be met.

Small and medium businesses can plan for an SME-IPO to transform into a successful and wealthy public listed company. To issue IPOs and get listed on the exchange, SMEs should meet the following requirements:

• Be incorporated under the Companies Act, 1956
• Have a face value of up to ₹ 25 crore
• Possess net tangible assets should be worth ₹1.5 crore
• Have a track record of a minimum of three years if it was formed by converting partnership/proprietorship/LLP firms
• Should have a website
• Should not change for at least a year after filing the IPO
• Should agree to trade in Demat securities
• Should enter into a contract with the depositories

Additionally, other listing conditions that need to be kept in mind include:

• The company should not have been referred to the former Board for Industrial and Financial Reconstruction (BIFR) nor have any proceedings under the Insolvency and Bankruptcy Code.
• The company should not have any record of receiving a winding up petition by a NCLT/Court.
• There should be no material regulatory or disciplinary action taken against the SME by a stock exchange or regulatory authority in the past three years.

In terms of disclosures, the following matters should be disclosed in the offer document:

• Any material regulatory or disciplinary action against the SME by a stock exchange or regulatory authority in the past one year in respect of promoters
• Defaults in respect of payment of interest and other collateral during the past three years.
• Litigation record, the nature of litigation, and status of litigation of the applicant, promoters/promoting company, group companies, etc.
• Status of criminal cases filed, or nature of the investigation been undertaken with regard to alleged commission of any offence by any of its directors or any of the directors of issuer who have or has been charge-sheeted with serious crimes like murder, rape, forgery, economic offences.

To sum up: How to plan for SME IPO?

If you are an SME who is seeking to raise capital, SME-IPO can be an ideal route for financial growth. The premier stock exchange platforms – NSE and BSE have provided small and mid-enterprises with the opportunity to raise equity capital for growth and expansion. You need to check the eligibility criteria before you plan to pursue your IPO dream. For assistance on business growth, you can also register at Tata nexarc.

At Tata nexarc, our goal is to help MSMEs find new opportunities and accelerate growth. Our offerings include small business loans, information on government tenders, logistics solutions, etc. to boost your business growth.