FINOCO

 

 

SME IPO Introduction

There are nearly five crore small and medium-sized enterprises (SMEs) in India, and many of them have begun to approach the IPO markets in the last four years, after SEBI put in place the necessary regulations and guidelines for the listing of such entities, following the success of Alternative Platforms in the UK and other financial centers. Both the BSE and NSE introduced their respective SME platforms in 2012 and have since been aggressively marketing the segment to small and medium-sized enterprises (SMEs).

To give small and medium-sized enterprises (SMEs) with access to the capital markets, stock exchanges have created a separate platform through which SMEs can do Initial Public Offerings (IPOs): The Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE) both provide platforms for small and medium-sized enterprises (SMEs).

The platform enables entrepreneurs of SMEs to raise equity funding for growth and expansion. It also offers investors a tremendous opportunity to identify and invest in promising SME startups at an early stage.

NSE Emerge is the largest SME exchange in India in terms of capital raised and market capitalization, whereas BSE is the leader in terms of the number of listed companies.

How it benefits SMEs ?

Small and medium-sized enterprises gain on multiple fronts by listing on an exchange platform. They are able to clean up their balance sheets and enhance their credit rating, which reduces their bank financing costs; they may also raise short-term capital by pledging equity and gain the prestige of being a "listed business."

• Funding Convenience
• M&A currency
• Premium Valuation
• Visibility – Profile Building
• Unlocking / Benchmarking Value
• Incentive Mechanism for Employees
• Benefit for Companies in Supply Chain
• Governance – Internal Systems
• Access to capital and financing opportunities
• Entry & Exit Platforms for PE / Other Investors

Risks for Investors subscribing for SME IPO.

The majority of a SME's funds are required for research and innovation, yet its credit history may not qualify it for institutional finance. In addition, banks are unwilling to provide them loans for what they deem to be excessively hazardous. So this danger is now borne by those who subscribe to the primary issue.

This kind of investing is extremely high-risk and high-reward because to the company's lack of a well-established track record, its small size, and its promoter's unpredictable behavior.

Nearly half of the SME IPOs that made news last fiscal year for being oversubscribed are trading below their offer price, raising questions about their values. Some others that have been successful have yielded returns ranging from 47% to 1000%!

In addition, the SME listing requirements are significantly less strict than those for larger corporations; SMEs simply have their offer documents assessed by the respective stock exchanges and not the Securities Exchange Board of India (SEBI). They must reveal semiannual results rather than quarterly ones, although it is not required that they publish results in newspapers. Fewer disclosures would increase the market's risk.

Last but not least, there is the problem of insufficient liquidity, which prohibits investors from buying and selling equities at will. While 100 of the offerings are underwritten and 15 percent of the issue is underwritten by merchant bankers, liquidity is never there since pricing is subjective. Also, the minimum lot size is Rs 1 lakh, which magnifies the price volatility for smaller investors.

 

Criteria for SME listing on an exchange

• The net tangible asset of at least 3 crore rupees, according to the most recent audited financial accounts.
• according to the most recent audited financial accounts, a minimum net value of Rs. 3 crore (excluding revaluation reserves).
• The company's post-issue paid-in capital will have to be Rs 3 crore.
• Owing a website is compulsory .
• The company must facilitate demat trading and engage into an agreement with both depositories.
• Companies must have distributed earnings in accordance with Section 124 of the Companies Act 2013 for at least two of the three most recent financial years (excluding extraordinary income).
• According to SEBI regulations, the minimum trading lot for SME IPOs ranges from 100 to 10,000 depending on the price band of the issuance. Such postings are evaluated routinely and changed in accordance with price fluctuations.

Difference between SME IPO and IPO