This article was written by Raman Singan, pursuing an Executive Certificate Course in Corporate Governance for Directors and CXOs from LawSikho and edited by Shashwat Kaushik. This article provides you with an overview of how SME-IPO works.
It has been published by Rachit Garg.
Table of Contents
What is SME IPO
Small and medium enterprises-initial public offering, abbreviated as SME-IPO or also referred to as MSME-IPO is an offer to the public for the subscription of shares for the first time. MSMEs, also referred to as start-up companies in the business ecosystem, are the backbone of India’s economy and contribute 33% of India’s GDP. SMEs are the pillar of India’s economy, as they contribute to employment and income generation. The idea is to directly tap public markets and gain substantial liquidity in the process. Large corporations have stringent regulatory requirements, while SME’s/MSMEs have relatively relaxed regulations. In 2011, SEBI approved SMEs raising funds through a public issue (SME-IPO).
Before getting into the topic of the IPO listing of SMEs/MSMEs, let’s look at which enterprise qualifies for SMEs/MSMEs. To qualify as an SME/MSME, two criteria are used. One based on investment and the other based on turnover.
| Classification | Micro | Small | Medium |
| Manufacturing and services | Investment<Rs. 1 Cr. &Turnover< Rs. 5 Cr. | Investment<Rs.10 Cr. &Turnover<Rs. 50 Cr. | Investment<Rs.50 Cr. &Turnover<Rs. 250 Cr. |
Advantages of listing
- Easy access to equity capital, thereby lowering the debt burden, leads to low financing costs.
- Enhances company’s visibility as it goes to public, which enables company to build a corporate image, thereby increasing brand value.
- Facilitates expansion of the investor base, which helps company get access to secondary market.
- Increased participation from equity investors.
Prerequisites to launch SME IPO
- Changes in the Board of Directors, like appointment of independent directors, CFOs, etc.
- Should have its own website.
- 3 years financial statement to be published on its website.
- Appoint merchant bankers, share transfer agents and carry out agreements with them.
Eligibility before going in for an IPO
- The company should be incorporated under the Companies Act 2013
- SME’s must have a minimum paid-up capital of Rs. 3 crore and maximum of Rs. 25 crore.
- SME’s should have net tangible assets of Rs. 3 crore. Tangible Assets are Total physical assets like land, buildings, plants, machinery, furniture and fixtures minus intangibles like goodwill, patents, and copyright.
- SME’s should have a Net Worth of Rs. 3 crore. (Net Worth = total assets minus total liabilities.)
- A financial statement should show distributable profits for at least two years out of three preceding financial years, excluding extraordinary incomes.
- 25% of the shares are to be held by the public.
- There should be minimum of 50 investors to subscribe to the IPO
- 100% mandatory underwriting, of which 15% must be done by Merchant Bankers in their own accounts, to ensure that issue is fully subscribed.
- Minimum application amount Rs. 1,00,000 per trading lot.
- Shares need to be sold in lots, not individually.
- Half-yearly reporting is mandatory.
- Mandatory trading in Demat form.
Key players in the IPO process
Key players in the IPO process are:
- Promoter,
- IPO assistants,
- Registrar of Companies (ROC),
- Merchant bankers,
- Registrar and Share Transfer Agents (RSTA),
- Market makers,
- Depositories (NSDL and CSDL),
- Stock exchanges (BSE and NSE), and
- Statutory auditors.
Working of SME IPO
SMEs must comply with the below two-stage processes:
- Pre-listing compliance, and
- Post-listing compliance
Pre-listing compliance
SMEs need to fulfil certain conditions mandated by SEBI to complete the listing process, which are:
- Merchant bankers: As a first step, SMEs need to appoint merchant bankers, who will act as a lead manager on the issue.
- Compliance and due diligence: The next step is to ensure that all financial metrics reflect true and fair view of the affairs of the company. This is to ensure that there is no discrepancy in the data that can impact company’s performance.
- Filing of Draft Red Herring Prospectus (DRHP): It contains comprehensive information on the operations of the company and acts as a guide for prospective investors.
- Scrutiny and feedback: All the documents submitted undergo thorough scrutiny to eliminate discrepancies and ensure that information provided is not misleading.
- Site visit: A site visit is done by relevant officers to ensure that the company exists.
- Approval: Approval is given subject to fulfilling certain additional conditions. The company needs to satisfy all the conditions before opening the offer to the public.
- Opening the issue: The offer is open to the public to bid, which remains open for few days before the offer closes.
- Listing of shares: It takes about a week to list the shares in the market. Once the shares are listed and allotted, they are then available to the investors for trading in the secondary market.
Post-listing compliance
Some post listing compliances are:
- The outcome of the Board meeting is to be announced within 15 minutes of the meeting’s closure.
- The annual report must be published as soon as it is issued
- Share holding patterns are to be disclosed half yearly within 21 days from the end of each half year as per format specified
- Financial results are to be sent half yearly within 15 minutes from the closure of the meeting in the format specified
- 1st half yearly report to be accompanied by a limited review report to be submitted within 45 days of the end of the first half year
- 2nd half yearly report is to be accompanied by an audit report to be submitted within 60 days of the end of the second half year/ financial year
- A quarterly corporate governance report must be submitted within 15 days of the end of each quarter.
- Reconciliation of the share capital audit report to be submitted on a quarterly basis within one month from the end of each quarter.
Vital statistics
| No. of companies listed on BSE SME till date (25 August, 2023) | 450 |
| Market cap of companies listed on SME till date (Rs. crore) (25 August, 2023) | 83,124.07 |
| Total amount of money raised till date (Rs. crore) (25 August, 2023) | 5,454.73 |
| No. of companies migrated to main board | 179 |
| No. of companies listed as of date (25 August, 2023) | 271 |
Hurdles faced by SMEs/ MSMEs
Despite the contribution of the SME sector to India’s GDP in terms of employment generation and achieving balanced economic growth, MSMEs face several challenges. To name a few, like funding constraints, a lack of marketing and branding for their products, and labour related challenges. To overcome this,the government has taken steps to strengthen and enhance the competitiveness of the MSME sector by passing the Micro, Small, and Medium Enterprises Development Act, 2006, so that the bottlenecks are eliminated.
Conclusion
Though SME-IPO’s add immense value to start-ups and the business ecosystem, they are still in their infancy. Currently, the market cap of the SMEs is insignificant but will continue to grow as India’s start-up ecosystem continues to mature. SME IPOs help investors gain access to early-stage opportunities that have been the purview of venture capitalists and financial institutions.
References
- https://www.businessworld.in/article/Wrap-up-2022-MSME-Sector-India-s-Economic-Backbone-/27-12-2022-459446/
- https://www.livemint.com/
- https://www.tpci.in/indiabusinesstrade/blogs/budget-2023-24-msmes-to-drive-growth/
- https://www.pib.gov.in.)
- https://samadhaan.msme.gov.in/WriteReadData/DocumentFile/MSMED2006act.pdf
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