If you tell me what is a SME IPO , then before that we have to understand the normal IPO. In the past few years, India has seen a lot of retail interest in IPOs. Many well-known companies have successfully gone public, and many more are getting ready for an IPO. So, investors have been very interested in these IPOs, and many of them have been oversubscribed.
Companies that have recently gone public through a mainstream IPO are big ones with a big market cap and a lot of money behind them. But does that mean that only big businesses can afford to go public to get money? The other choice is SME IPO. Small and medium-sized businesses will be able to go public if they have a SME IPO. Let’s learn more about it to find out how it works.
What is a SME IPO?
As was said above, a mainline initial public offering (IPO) lets bigger companies go public and raise money. Small and medium enterprise IPOs, on the other hand, are for smaller companies that want to raise money from the public.
SME IPO is done, and the shares are listed on a different platform than with mainline IPO. This is done to make the process easier. An SME IPO is open to both individual and institutional investors.
Just like a normal IPO, but the rules are different to fit the needs of small and medium-sized businesses and investors who want to put money into them.
How does SME IPO work?
SME IPO is a way for small and medium-sized businesses to raise money by going public. The process is a lot like a normal IPO, but there are a few small differences.
A merchant banker is chosen as the first step in the process. A banker will carefully look at the financials of a company to help the company get its numbers right. This is also called “underwriting.” This includes things like how much money the company wants to get and how much the stocks will sell for in an IPO.
Then the company would start getting ready for the IPO. This usually starts with structuring the capital. The company would figure out its capital structure with the help of a banker.
When a company goes public, it has to share a lot of information with the public because it has to be open and honest. Capital structuring helps the businesses get ready for this.
Once the company has decided on its capital structure, they will start hiring bankers, registrars, market makers, etc. At this step, companies will be very careful to make sure they hire the right people, since the performance of the people who work on the IPO can make or break it.
The company will then start making the DRHP, which stands for draught red herring prospectus. This document has everything that was known at the time about the company and the IPO. The document is meant to help investors decide whether or not to buy shares in the company’s initial public offering (IPO).
DHRP will have information like how well the company did financially in the last quarter and what it hopes to do in the next quarter. It will also explain how the company plans to run after it goes public. Investors can use the information to figure out if putting money into the company fits with their investment goals and how much risk they are willing to take.
The company will send the DRHP to the stock exchange once it is ready. In a normal IPO, the Securities and Exchanges Board of India, or SEBI, will look over the DHRP.
But stock exchanges do the same thing for SME IPOs.
Once the stock exchange approves the company’s DRHP, it will be available to the public. While small investors decide what to do, the company will start figuring out how much the stock is worth.
At this point, the bankers and underwriters will have given the company information, and together they will come up with a price that they think will work.
The next step is for the company to go public. At this point, investors will be able to apply for the stocks, which is similar to how an IPO works for a big company. Even in a SME IPO, investors will buy shares as a group, but the top size will be bigger than in a mainline IPO.
As the last step, the investors who have applied will be given the shares. They will also start trading on the stock market, which is different from what the mainline companies do.
The rules for listing a BSE SME IPO
As was already said, small and medium-sized businesses trade on a different stock market. BSE SME is the name of the SME platform at the Bombay Stock Exchange. Here are the requirements for getting on the exchange.
Before the issue, the company should be a limited liability company with a face value of Rs.1 crore.
Also, the face value of the bond should be less than Rs.25 crore. Companies with a face value above that are considered for a mainline IPO. The company should also have a net worth of at least Rs.1 crore.
The company should have a website where investors can find information that will help them decide whether or not to invest in the company.
The company should agree to make trading in demat securities easier and sign a contract with the depositories.
One year before the company files for an IPO under the BSE SME sector, the promoters should not change.
The rules for the NSE SME IPO on the national stock exchange are also similar, with a few small differences.
Difference between a SME IPO and a regular IPO
The main difference is the size of the company that can have an IPO. Post-issue paid-up capital is used to figure this out. For SME IPOs, this number should be between Rs.1 crore and Rs.25 crore. For regular IPOs, it should be at least Rs.10 crore.
For a regular IPO, there should be at least 1000 people who own shares. For a SME IPO, you need to have 50.
For a normal IPO, SEBI checks and approves the DRHP and other documents. For a SME IPO, however, this is done by the stock exchange.
A normal IPO has an application size of between Rs.10,000 and Rs.15,000. It is a bigger Rs.1,00,000 for SME IPO.
Conclusion
Small and medium-sized enterprises (SME) initial public offerings (IPOs) are a great way for small investors to buy shares in some of the fastest-growing companies. Make sure you keep up with your research so you can make the most of the chance.