Table of Contents
Raising the required funds for business is always a challenging task for entrepreneurs. There are several options to raise funds. Small and Medium Enterprises (SME) IPO is one of the effective ways. SME IPO allows small and medium enterprises to get listed and traded on NSE/BSE, i.e., the stock exchanges. For this, the company has to come up with its Initial Public Offer (IPO) at the SME exchange platform. National Stock Exchange (NSE) offers a platform named NSE EMERGE for SMEs. This article discusses eligibility and procedure for listing on NSE to raise funds via NSE SME IPO.
Criteria to be fulfilled for NSE SME IPO
Here are the NSE listing requirements.
- The company must have paid up capital of ₹ 3 crore. It should be the same for net worth and tangible assets.
- According to the Companies Act 2013, Section 124, the company should have distributable profits for at least two of the preceding three financial years. This excludes any extraordinary income.
- There should not be any material regulatory or disciplinary action by a stock exchange or regulatory authority against the company in the last three years.
- There should not be any winding up petition against the company by NCLT/Court.
- The company must have an official website.
- The company has to be incorporated under the Companies Act 1956. It is noteworthy to mention here is that LLP companies cannot go public and issue IPO.
One more thing that company owners must remember is that as per SEBI’s guidelines, the minimum trading lot varies from 100 to 10,000. It depends on the price band of the issue. It is regularly reviewed and adjusted by SEBI depending upon price movement, post listing.
What is the procedure for SME IPO?
Opting for SME IPO is not a simple process. It is about a 3-4 month long process with the involvement of a lot of compliances and due diligence. Here is a detailed procedure for listing SME IPO.
Step 1: The process starts with the selection of a merchant banker or underwriter. The merchant banker will your company’s financials in detail and will help you in determining the stock price, the number of funds you need to raise, and so on. You need to be careful in choosing the merchant banker as listing is a critical task for your business. Check for the past experience of the merchant banker, it they have experience of doing SME IPO of companies in your or similar industry.
Step 2: The next step is compliance. The data such as accounts, facts and other financial details are thoroughly checked. This is because the information needs to be presented when the company goes public and any discrepancy or inconsistency may affect the IPO adversely. Hence, you must ensure that provided data is true and correct.
Step 3: Now, it is time to prepare Draft Red Hearing Prospectus (DRHP). This step is very similar to the mainboard IPO. This serves as a mission statement of the company. DRHP contains information on the operations of the company, financial performance, and future projections. This helps investors to decide whether to invest in your company or not.
Step 4: Once the DRHP is ready, it has to be submitted to NSE for review and seek their feedback. In case you want to make any revision or correction, it has to be done before getting final approval from NSE. The process may also involve a site visit from NSE to check the accuracy of data. In the case of the mainboard IPO, the review is done by SEBI and not the stock exchange.
Step 5: After the verification process of DRHP, it is made available to the public. Meanwhile it is time for you to decide on stock prices. Your merchant banker or underwriter will help you in this step.
Step 6: Now, here comes the D-day. The issue is open to the public. You can undertake marketing activities to attract more investors. The issue remains open for a few days and then it closes. Post that shares are allocated to the investors who have applied for it and then the free trading will take place on the NSE EMERGE platform.
What is the right option to raise funding?
As mentioned before, when it is only about raising funds, there are multiple options available including a business loan and equity financing. You can get a business loan depending on your eligibility while the success of an IPO depends on your past financial performance.
SME IPO is comparatively a long process. However, there are advantages and disadvantages of both and it is entirely a business decision to choose the one.
Here are some of the prominent differences between an SME IPO and a business loan to help you take an informed decision.
Business loan vs Equity financing (IPO)
|Business loan||Equity financing (SME IPO)|
|Processing time||A business loan is usually processed within 10-30 days.||SME IPO takes around 3-4 months.|
|Debt||It adds to your debt burden.||It lowers your debt burden.|
|Repayment/payback||The monthly installment or EMI is a fixed amount based on the loan interest rate and other factors.||No repayment obligation. It depends on the financial performance of the company.|
|Business ownership||You do not give away any ownership of your business.||You partly give away ownership of your business.|
|Credit score||Timely repayment can improve credit scores.||It does not improve credit score.|
|Eligibility||Eligibility depends on your credit score and other criteria defined by banks.||SME IPO eligibility criteria are regulated by SEBI/Stock exchange.|
There are several benefits of opting for SME IPO. As a business owner, you need to analyse what makes the better sense for your business. Many companies usually opt for combination for both SME IPO and a business loan. However, it is a conscious call that a business owner needs to take.