A Comprehensive Guide to Launching an SME IPO: Requirements, Fees, Compliance, and Listing Process

Nitin Naresh October 28, 2024

0 5,255 7 minutes read

Launching a Small and Medium Enterprise (SME) Initial Public Offering (IPO) requires careful planning, adherence to specific requirements, understanding of fees, and adherence to regulatory guidelines. This article provides a detailed guide on the essential components for launching an SME IPO, including eligibility, fees and charges, compliance, timeline, and the listing process. Here’s a comprehensive look at how SMEs can navigate the IPO process.

1. Introduction to SME IPOs

An SME IPO is a public listing for small and medium-sized enterprises on specialized platforms like BSE SME and NSE Emerge in India. This avenue allows SMEs to raise capital while also gaining visibility and credibility in the market. The process, however, is slightly different from a mainboard IPO due to the unique characteristics of SMEs. For an SME to go public, it must meet a range of eligibility requirements, fees, and follow the prescribed process.

2. Requirements to Launch an SME IPO

SMEs intending to go public must fulfill several financial and non-financial criteria.

Company Age and Stability: Typically, SMEs should be operational for a minimum of three years, with consistent profitability or stable financial performance in at least two of those years.
Minimum Net Worth and Tangible Assets: Companies need a net tangible asset base of at least ₹3 crore, and in some cases, a net worth criterion of at least ₹1 crore.
Capital Requirement: The paid-up capital of the SME, post-issue, should not exceed ₹25 crore. Exceeding this would require a mainboard listing.
Demonstrable Business Model: SMEs must show sustainable revenue sources, market presence, and growth potential. This is usually evaluated by the appointed merchant banker.
Promoter Requirements: Promoters should have a clean legal record, a positive reputation, and should ideally not be associated with any bankruptcy or significant defaults.

3. Fees and Charges Involved in an SME IPO

Launching an SME IPO involves multiple charges, from regulatory fees to advisory fees. Here’s a breakdown:

Merchant Banker Fees: A merchant banker, registered with SEBI, charges fees based on issue size and responsibilities. This can range between ₹20 lakh to ₹50 lakh or more, depending on the scale of the IPO.
Registrar and Transfer Agent (RTA) Fees: RTAs manage shareholder information and transfer-related activities. Their fees typically range from ₹1 lakh to ₹5 lakh.
Stock Exchange Listing Fees: NSE Emerge and BSE SME have specific listing fees, which could vary depending on the exchange and issue size. These fees typically start at around ₹1 lakh annually for smaller issues.
SEBI Filing Fees: Companies must file a draft prospectus with SEBI, which requires fees based on the issue size.
Auditors and Legal Counsel Fees: Auditors verify financial statements, while legal counsel ensures regulatory compliance. Their fees vary based on the complexity of the IPO.
Marketing and Promotion Costs: To attract investors, companies often allocate funds for advertising and roadshows, which could add another ₹10 lakh to ₹20 lakh.

4. Compliances and Formalities for SME IPOs

Adhering to regulatory compliance is vital in an SME IPO. Regulatory bodies, including SEBI and stock exchanges, enforce specific compliance to ensure transparency and protect investors.

a. SEBI Regulations

The Securities and Exchange Board of India (SEBI) mandates several disclosures and transparency standards in the IPO process, including:

Draft Red Herring Prospectus (DRHP): A comprehensive document containing financials, risk factors, and business models. SEBI reviews the DRHP, after which it may request changes before approval.
KYC (Know Your Customer) Compliance: Promoters and the company must undergo KYC verifications, which includes disclosing information about criminal records or past regulatory actions.
Post-Issue Compliance: After listing, SMEs must meet reporting requirements such as quarterly financial statements, shareholding patterns, and annual reports.

b. Stock Exchange Guidelines

Both NSE Emerge and BSE SME set guidelines for SME IPO listings:

Listing Agreement Compliance: Companies must agree to periodic disclosure requirements.
Corporate Governance Norms: SMEs must follow basic governance norms, such as having an independent director on the board.
Shareholding Restrictions: Promoters need to retain a certain percentage of their shareholding, generally for three years post-IPO, to instill confidence in the stability of the company.

c. Investor Protections

Stock exchanges require that the SME’s issue be fully underwritten, ensuring that in case of undersubscription, the underwriter will purchase the remaining shares. Also, SMEs are limited to issuing shares to qualified institutional and non-institutional investors, enhancing investment credibility.

5. Timeline for an SME IPO

The process of launching an SME IPO, from initial planning to the first trading day, takes approximately 3-6 months. Here’s a breakdown of key stages:

Preliminary Preparation (1-2 months): This includes appointing a merchant banker, preparing documents, and conducting due diligence.
Drafting and SEBI Filing (1 month): The draft prospectus is prepared and filed with SEBI. This step involves reviewing company financials, operations, and compliance.
SEBI and Stock Exchange Approval (1-2 months): SEBI reviews the draft, while exchanges conduct independent assessments. Upon approval, the prospectus is finalized.
Roadshow and Marketing (1 month): The company, alongside merchant bankers, engages potential investors through presentations and roadshows.
IPO Opens for Subscription (1 week): Investors can subscribe to the IPO for a limited period, typically 3-7 days.
Listing (T+6 days): After the IPO subscription closes, the company lists on the SME platform. Within six days, shares are allocated to subscribers, and trading commences.

6. Requirements for Launching an SME IPO

Launching an SME IPO entails not only fulfilling eligibility criteria but also preparing extensive documentation and aligning with SEBI guidelines.

Appointment of Merchant Banker: A SEBI-registered merchant banker is mandatory to handle the IPO process. They assist with pricing, marketing, due diligence, and regulatory filings.
Preparation of Draft Prospectus: The prospectus is a legal document that contains all relevant information about the company. It’s mandatory to disclose business details, management, financials, and risk factors.
Financial and Legal Audit: An audit verifies the company’s financial statements, helping to instill confidence among potential investors.
Underwriting: Full underwriting is required to ensure that the issue succeeds, even if retail investor interest is low.
Investor Presentations and Roadshows: Companies must conduct presentations and roadshows to attract investor attention, typically to institutional investors.

7. Listing Process for SME IPO

The listing process is a sequence of steps that transforms a private SME into a public entity listed on an SME exchange platform. Here’s a breakdown:

Engagement with Merchant Banker: The process begins by partnering with a merchant banker to handle legalities, financial audits, and marketing.
Document Preparation: Comprehensive preparation of documents, including the DRHP, financial statements, and corporate disclosures. It’s the merchant banker’s responsibility to ensure accuracy and transparency.
Filing with SEBI and Stock Exchanges: Submit the DRHP to SEBI and stock exchanges for review. After SEBI comments are addressed, the Red Herring Prospectus is filed, signaling the green light for proceeding.
Price Band Setting and IPO Marketing: Establish a price band for the shares, which involves conducting a valuation of the company. Investor outreach efforts through marketing and roadshows intensify here.
Public Subscription Period: During this phase, shares are available to qualified institutional buyers, non-institutional investors, and select retail investors over a 3-7 day window. Full subscription is necessary for a successful issue.
Allocation and Listing: After the subscription window closes, shares are allocated to investors based on demand. The final listing takes place within six business days, and shares become tradable on the SME exchange.

8. Benefits and Challenges of SME IPOs

Benefits:

Capital for Growth: IPOs provide SMEs with necessary funds to expand operations, enter new markets, or enhance infrastructure.
Enhanced Visibility and Credibility: A public listing on BSE SME or NSE Emerge increases brand credibility and investor confidence.
Improved Valuation and Wealth Creation: Listing allows promoters to realize the market value of their shareholding, which may also increase personal wealth.

Challenges:

Regulatory Compliance: SMEs face significant regulatory burdens, requiring strict adherence to SEBI and exchange guidelines.
Costly Process: The IPO process is capital-intensive due to fees, underwriting costs, and marketing expenses.
Market Volatility: SME shares are often more volatile post-listing, impacting share prices and investor sentiment.

9. Post-IPO Responsibilities

Once listed, SMEs must meet ongoing requirements to retain investor confidence and comply with exchange regulations.

Quarterly Financials and Annual Reporting: Companies are required to disclose quarterly and annual financial statements to maintain transparency.
Shareholding Pattern Disclosure: Exchanges mandate regular updates on the distribution of shares among promoters, institutional investors, and other shareholders.
Periodic Audits and Corporate Governance: Corporate governance is crucial for maintaining trust, requiring SMEs to adhere to governance codes, including appointing independent directors.

10. Conclusion

Launching an SME IPO is a transformative journey that opens doors for growth, funding, and market credibility. Although it requires substantial preparation, adherence to regulations, and financial investment, Launching an SME IPO is a structured yet rewarding journey that enables small and medium enterprises to raise capital and grow. Below is a detailed guide, covering everything from requirements and fees to the listing process:

1. Requirements for an SME IPO

SMEs must meet several criteria, including:

Age and Financial Health: Typically, at least three years of operation with steady revenue.
Minimum Capital and Net Worth: A net tangible asset base of at least ₹3 crore and post-issue paid-up capital below ₹25 crore.
Credibility of Promoters: Clean records and a stable reputation.

2. Fees and Charges

The IPO process incurs several costs, such as:

Merchant Banker Fees: Ranges from ₹20-₹50 lakh, varying with issue size.
Registrar Fees: About ₹1-₹5 lakh for shareholder management.
Exchange Listing Fees: NSE Emerge and BSE SME listing fees vary based on issue size.
SEBI Filing Fees: Based on the size of the offering.
Legal and Audit Fees: Critical for ensuring compliance and transparency.

3. Compliance and Formalities

Complying with SEBI and stock exchange regulations is mandatory:

Draft Red Herring Prospectus (DRHP): Discloses company financials, risks, and operations.
KYC Compliance: Includes promoter verification.
Ongoing Reporting: Post-IPO, SMEs must submit quarterly reports and shareholding patterns.

4. Timeline for Launch

An SME IPO generally spans 3-6 months:

Initial Preparation (1-2 months): Engage a merchant banker and prepare documents.
Drafting and SEBI Filing (1 month): Submit DRHP to SEBI.
Approval and Marketing (1-2 months): Post-approval, companies conduct investor roadshows.
Public Subscription (1 week): Investors subscribe over a 3-7 day window.
Listing (T+6 days): Shares are allocated, and trading starts within six days.

5. Listing Process

Steps for listing include:

Merchant Banker Appointment: Coordinates the IPO.
Document Preparation: Covers financials and compliance records.
SEBI and Exchange Filings: Submit and revise the DRHP.
Pricing and Promotion: Set the price band and attract investors.
Share Allocation and Trading: After subscription, shares are allocated and tradable.