SME IPO Listing in India – Platforms, Eligibility, Process

In recent years, the SME IPO listing in India has emerged as a vital avenue for small and medium enterprises (SMEs) to access capital and enhance their market presence. With a growing number of platforms facilitating these listings, SMEs can now tap into public funding more easily than ever. This blog will explore the various platforms available for SME IPOs, the eligibility criteria that businesses must meet, and the step-by-step process involved in listing on the stock exchange. Understanding these elements is crucial for entrepreneurs looking to leverage the benefits of going public and drive their growth in a competitive landscape.

What are Small and Medium Enterprises (SME)?

Small and Medium enterprises (SMEs) are classified as such through the Micro, Small and Medium Enterprises Development Act, 2006, wherein eligibility thresholds are prescribed for enterprises engaged in manufacture or production of goods in specified industries; or enterprises providing or rendering of services, as captured below:

Category	Small Enterprise	Medium Enterprise
Engaged in manufacture or production of goods in specified industries	Investment in plant and machinery is more than INR 25,00,000 but does not exceed INR 5,00,00,000.	Investment in plant and machinery is more than INR 5,00,00,000 but does not exceed INR 10,00,00,000.
Engaged in providing or rendering of services	Investment in equipment is more than INR 10,00,000 but does not exceed INR 2,00,00,000.	Investment in equipment is more than INR 2,00,00,000 but does not exceed INR 5,00,00,000.

Note: When calculating the investment in plant and machinery, the cost of pollution control, research and development, industrial safety devices and such other items as may be specified, by notification, shall be excluded.

What is an IPO?

Initial Public Offering (IPO) is the first invitation by a company to have their equity securities purchased by the general public. This allows the company to raise capital by inviting public investment into the company. Given that the general public is involved in the fund raising process, the IPO is subject to strict scrutiny and exhaustive regulatory compliances. This is typically undertaken by companies that have a large and established presence, and with a paid up share capital of at least INR 10,00,00,000. Such companies would be traded directly on the platforms hosted by the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE), and are required to strictly comply with regulations prescribed by the Securities and Exchange Board of India (SEBI) from time to time.

Why should SMEs explore IPO?

SMEs are the backbone of the Indian economy and play a crucial role in job creation, innovation, and overall economic growth. These companies often face challenges when it comes to raising capital for growth as they have limited access to capital. In this context, an IPO is extremely beneficial to an SME:

• Capital Injection: Public offerings attract a broader pool of investors, enabling SMEs to raise significant funds for growth initiatives like expanding operations, investing in research and development, or acquiring new technologies.
• Enhanced Credibility: A successful listing serves as a public validation of a company’s financial health and governance practices. This newfound credibility can attract valuable partnerships, potential acquisitions, and a wider customer base.
• Increased Liquidity: Listing on an exchange creates a secondary market for the company’s shares. This allows existing investors to easily exit their positions and attracts new investors seeking participation in the company’s future. Improved liquidity benefits both the company and its shareholders.

What are IPO Listing Platforms?

Traditional listing platforms India as hosted on the BSE and NSE are subject to exhaustive regulatory compliances, including multiple layers of approval by SEBI,  BSE and/or NSE (as chosen by the company). This can contribute to the inaccessibility of capital leading to the emergence of SME IPO Listing Platforms as a game-changer. 

As on date, two IPO Listing Platforms are hosted in India exclusively for SMEs: 

• BSE SME Platform: Established by the Bombay Stock Exchange (BSE), this platform offers a dedicated marketplace for SMEs to list their shares. It provides a comprehensive support system, including guidance on regulatory requirements and listing procedures.
• NSE Emerge: This platform, operated by the National Stock Exchange of India (NSE), caters specifically to the needs of growing companies. It offers a transparent and efficient listing process, along with educational resources and investor outreach programs.

Operating in accordance with relaxations on IPO processes prescribed for SMEs by SEBI, these platforms create an opportunity for SMEs to take advantage of the expedited process and increase their access to capital. 

Why IPO Listing Platforms?

To avail the core advantages of going for an IPO, SME IPO Listing Platforms offer a more streamlined and cost-effective path to going public compared to the traditional IPO route. Reduced regulatory requirements and simplified processes make it easier for promising SMEs to access the capital markets.

In the following sections, we’ll delve deeper into the specifics of these platforms, exploring the eligibility criteria for listing and also address potential challenges and considerations for SMEs contemplating this exciting funding option.

These platforms operate on leading stock exchanges and provide a streamlined process for SMEs to go public.  By listing their shares on these platforms, SMEs can:

• Raise capital: Public investors can purchase shares in the company, injecting much-needed funds for expansion and development.
• Enhanced credibility: A public listing demonstrates a company’s financial transparency and stability, potentially attracting more business opportunities and partnerships.
• Increased liquidity: Shareholders can easily buy and sell shares, providing greater liquidity for the company’s stock.

Eligibility Criteria for Listing

To be eligible for listing on an SME IPO Platform, companies must meet specific criteria established by the Securities and Exchange Board of India (SEBI) and the respective stock exchange.  Here’s a general overview:

• Company Type: The company must be a Public Limited Company incorporated under the Companies Act, 1956 or 2013.
• Track Record: A minimum track record of operations, typically 3-5 years, is often required.
• Financial Performance: The company must demonstrate consistent profitability and a healthy financial position. Specific requirements for minimum net worth and positive cash flow may apply.
• Post-Issue Capital: The paid-up capital of the company after the IPO should typically fall within a specific range, often between Rs. 1 crore and Rs. 25 crore.

Choosing the Right SME IPO Listing Platform

While both BSE SME and NSE Emerge offer avenues for SME growth, selecting the optimal platform requires careful consideration of several factors:

• Industry Focus: A platform with a strong presence in the target sector can provide access to more targeted investors, potentially leading to a more successful IPO.

• Investor Base: Analyze the existing investor base of each platform. If the company caters to a niche market, choose the platform that attracts investors interested in similar sectors. This increases the likelihood of finding investors who understand your business model and are more likely to invest.

• Listing Fees: Compare the listing fees and ongoing maintenance charges associated with each platform. While cost shouldn’t be the sole deciding factor, understanding the financial implications is crucial. Choose the platform that offers a competitive fee structure while aligning with the budget.

• Support Services: Evaluate the level of support and guidance offered by each platform. Some platforms provide comprehensive assistance with the listing process, regulatory compliance, and investor outreach. Choose the platform that offers the level of support that best suits the needs of the company and internal resources.

By carefully considering these factors, SMEs can make an informed decision about which platform best positions them for a successful IPO and sustainable growth.

The SME Listing Process: A Step-by-Step Breakdown

The process of listing on an SME IPO Platform involves several crucial steps:

1. Appointment of Advisors:

• Merchant Banker: This financial institution acts as the lead manager, handling the entire IPO process, from pre-IPO planning to investor outreach and post-listing activities.
• Legal Counsel: An experienced lawyer ensures compliance with all legal and regulatory requirements throughout the listing process.
• Statutory Auditor: An independent auditor conducts a thorough audit of the company’s financial statements to provide an impartial assessment of its financial health.

2. Preparation of Documents:

• Draft Red Herring Prospectus (DRHP): This comprehensive document outlines the company’s financial position, business plan, future prospects, and details of the proposed IPO. It serves as a crucial information source for potential investors.

3. Regulatory Approvals:

• SEBI: The Securities and Exchange Board of India is the primary regulator for the Indian stock market. Seeking approval from SEBI ensures compliance with all relevant regulations and protects investor interests.
• Stock Exchange: After receiving SEBI approval, the company must obtain approval from the chosen SME IPO Platform (BSE SME or NSE Emerge) for listing.

4. Pre-IPO Due Diligence:

• An appointed intermediary, typically the merchant banker, conducts a thorough due diligence process to verify the information provided in the DRHP and assess the company’s financial health and future prospects. This protects investors and ensures accurate information dissemination.

5. IPO Launch and Marketing:

• Once all approvals are obtained, the IPO is officially launched. This involves intensive marketing efforts to attract potential investors. Roadshows, presentations, and targeted marketing campaigns are all essential during this stage.

6. Listing and Trading:

• Upon successful completion of the IPO, the company’s shares begin trading on the chosen SME platform. This marks a significant milestone, providing the company with access to public capital and increased visibility.

Challenges and Considerations for SME IPOs

While SME Listing Platforms offer a promising route for growth, navigating the process and maintaining success requires careful consideration of potential hurdles:

• Market Volatility: The stock market is inherently volatile. Fluctuations in market sentiment can significantly impact the success of an IPO. Careful timing and a well-defined marketing strategy can help mitigate these risks.

• Regulatory Compliance: Maintaining ongoing compliance with SEBI regulations requires expertise and dedicated effort. Partnering with experienced legal counsel ensures adherence to all regulations and protects the company from potential penalties.

• Investor Relations: Building and nurturing strong relationships with investors is crucial for long-term success. Regular communication, transparent reporting, and addressing investor concerns are key to fostering trust and confidence. Strong investor relations can lead to continued support and enhanced share value.

NSE Emerge – Criteria For Listing

	Parameter	Criteria for listing – SMEs	Criteria for listing – Technology Startups*
1.	Incorporation	Incorporated under Companies Act 1956/2013	Incorporated under Companies Act 1956/2013
2.	Post Issue Paid-up Capital	Post issue paid up capital (face value)<= INR 25 cr.	Post issue paid up capital (face value)<= INR 25 cr.
3.	Track Record	•Positive EBITDA in at least 2 out of the last 3 financial years preceding the application •Positive Net Worth	• Annual Revenue >= INR 10 cr. • Annual growth (users/revenue/customer base) >= 20%• Positive Net Worth
4.	Shareholding conditions	No specific shareholding condition	• At least 10% of its pre-issue capital to be held by qualified institutional buyer(s) (QIB) as on the date of filing of draft offer document. • At least 10% of its pre-issue capital should be held by a member of the angel investor network or Private Equity Firms and Such angel investor network or Private Equity should have had an Investment in the start-up ecosystem in 25 or more start-ups their aggregate investment is more than 50 crores as on the date of filing of draft offer document
5.	Other Conditions	• The applicant company has not been referred to erstwhile Board for Industrial and Financial Reconstruction (BIFR) • No proceedings have been admitted under Insolvency and Bankruptcy Code against the issuer and Promoting companies • The company has not received any winding up petition admitted by a NCLT / Court. • No material regulatory or disciplinary action by a stock exchange or regulatory authority in the past three years against the applicant company.	The applicant Company has not been referred to erstwhile Board for Industrial and Financial Reconstruction (BIFR) • No petition for winding up is admitted by a Court of competent jurisdiction against the applicant Company. • No material regulatory or disciplinary action by a stock exchange or regulatory authority in the past three years against the applicant company.
6.	Disclosure Requirements	• Any material regulatory or disciplinary action  by any authority in past one year • Any defaults in respect of payments • Litigation against the promoters • Track record of directors with respect to any cases filed or ongoing investigations , etc.	• Any material regulatory or disciplinary action  by any authority in past one year • Any defaults in respect of payments • Litigation against the promoters • Track record of directors with respect to any cases filed or ongoing investigations , etc.

BSE SME – Criteria For Listing

	Parameter	Criteria For Listing – SMEs
1.	Incorporation	Incorporated under Companies Act 1956/2013
2.	Post Issue Paid-up Capital	Post issue paid up capital (face value)<= INR 25 cr.
3.	Track Record	•Positive Net Worth •Net Tangible Assets should be INR 1.5 crores •Company must have distributable profits for at least two out of the last three financial years, excluding extraordinary income. •The company or the partnership/proprietorship/LLP Firm or the rm which have been converted into the company should have a combined track record of at least 3 years. OR •In case it has not completed its operation for three years then the company/ partnership/ proprietorship/ LLP Firm should have been funded by Banks or financial institutions or Central or state government or the group company should be listed for at least two years either on the main board or SME board of the Exchange.
4.	Other Conditions	•It is mandatory for a company to have a website. •It is mandatory for the company to facilitate trading in demat securities and enter into an agreement with both the depositories. •There should not be any change in the promoters of the company in preceding one year from date of filing the application to BSE for listing under SME segment
5.	Disclosure Requirements	• A certificate from the Applicant Company / Promoting Company stating that the Company has not been referred to the Board for Industrial and Financial Reconstruction (BIFR).•There is no winding up petition against the company, which has been admitted by the court or a liquidator has not been appointed.

Conclusion

In India, SME IPO listing platforms have become a game-changer for small and medium enterprises (SMEs) seeking to scale new heights. These platforms act as launchpads, providing SMEs with much-needed capital to fuel innovation, expand operations, and achieve their full potential. This, in turn, injects fresh dynamism into the Indian economy. Investors also benefit immensely, gaining access to a pool of promising young companies with the potential for explosive growth. The Indian government’s active support for SME IPOs, coupled with the continuous refinement of these listing platforms, paints a very optimistic picture for the future. However, navigating this exciting space isn’t without its challenges. SME IPOs often come with stricter listing requirements and lower liquidity compared to established main boards. Additionally, for investors, careful due diligence is paramount before venturing into these potentially volatile, yet highly rewarding, investment opportunities. By fostering a responsible investment culture and addressing existing challenges, India can ensure that its SME IPO market continues to thrive, propelling the nation’s economic growth for years to come.

FAQs on SME IPO Listing

1. What is an SME IPO?
An SME IPO is an Initial Public Offering specifically for Small and Medium Enterprises. It allows SMEs to raise capital by inviting public investment, helping them expand, improve liquidity, and enhance credibility.

2. What are SME IPO listing platforms?
SME IPO listing platforms are specialized stock exchange segments in India—like the BSE SME Platform and NSE Emerge—that cater specifically to SMEs. These platforms offer a more streamlined and cost-effective way for smaller companies to go public.

3. Why should an SME consider going public?
Going public through an IPO allows SMEs to:

• Access a broader pool of capital
• Increase brand visibility and credibility
• Provide liquidity for existing investors
• Open up new avenues for partnerships and growth

4. How do SMEs benefit from listing?
SMEs gain easier access to capital, increased visibility, and potentially higher valuations.

5. What benefits do investors gain from SME IPOs?
Investors in SME IPO benefit by:

• Accessing early-stage investment opportunities in high-growth companies
• Potentially realizing higher returns if the SME succeeds post-listing
• Diversifying their portfolios with promising companies in various sectors

6. Are there any challenges in SME IPO Listing?
SME IPOs often have stricter listing requirements, lower liquidity, and involve higher risk due to the young companies.

7. Are there any specific requirements for technology startups listing on NSE Emerge?
Yes, technology startups on NSE Emerge must:

• Have positive annual revenue of at least INR 10 crore
• Show annual growth in users, revenue, or customer base of at least 20%
• Ensure that 10% of pre-issue capital is held by qualified institutional buyers or a recognized angel investor network

8. How does the government support SME IPOs?
The government establishes regulations, offers tax benefits, and promotes awareness for both SMEs and investors.

9. What should investors consider before investing?
Conduct thorough due diligence on the company, understand the inherent risks, and invest within their risk tolerance and long-term goals.