Introduction

Small and medium-sized businesses can raise money by offering shares to the public through SME IPOs. This offers these businesses a much-needed source of funding, enabling them to expand their operations, invest in R&D, and raise their level of competitiveness in the worldwide market. The foundation of the Indian economy are small and medium-sized businesses (SMEs), which foster innovation, job creation, and economic expansion.

With the growing participation of investors and the increasing appetite for capital among emerging businesses, SME IPOs (Initial Public Offerings for Small and Medium Enterprises) have become a vital gateway for smaller companies to access equity markets. These platforms not only offer SMEs an opportunity to raise funds for expansion and visibility but also provide investors a chance to participate in the early growth stories of promising ventures.

However, listing on the SME exchange is subject to specific eligibility norms, regulatory frameworks, and procedural requirements that differ from main-board IPOs. This guide provides a comprehensive overview of the key eligibility criteria, listing guidelines, and the step-by-step listing process for SME IPOs equipping promoters, advisors, and investors with the information needed to navigate the journey with clarity and confidence.

CHAPTER IX of the SECURITIES and EXCHANGE BOARD OF INDIA (ISSUE OF CAPITAL AND DISCLOSURE REQUIREMENTS) REGULATIONS deals with the initial public offer by small and medium enterprises.

1. Eligibility Criteria for SME IPOs: A Regulatory Overview

SMEs that intend to obtain money from the general public through an IPO must fulfil specific eligibility conditions set forth in the SEBI (Issue of Capital and Disclosure conditions) Regulations, 2018, as amended. Transparency, investor protection, and the ease of SME listing are the goals of the regulations.

1. Paid-Up Capital

As per Regulation 229, if an issuer’s post-issue paid-up capital is ₹10 crore or less, they are qualified for a SME IPO. Subject to the conditions of the chapter IX, issuers with post-issue paid-up capital between ₹10 crore and ₹25 crore may still make an IPO.

2. Track Record Requirements

Issuers must fulfil the eligibility requirements set out by the SME Exchange, where the securities are intended to be listed, as well as the track record requirements. For organisations that were formerly partnership firms or limited liability companies, their financial statements must be in compliance with Schedule III of the Companies Act, 2013 and certified by auditors who hold a current certificate from the ICAI Peer Review Board.

3. Conversion and Promoter Change Conditions

The issuer must have been in business for at least one full fiscal year before submitting the draft offer document in cases where a proprietorship, partnership, or limited liability partnership is being transformed into a corporation. Further, the issuer must only submit a draft offer document a year after the date of the final change if the issuer’s promoter completely changes or if a new promoter or promoters have acquired more than 50% of the issuer’s shares.

4. Financial Performance

The issuer must have a minimum operating profit of ₹1 crore (EBIDTA) from at least two of the previous three financial years.

5. General Conditions

1. Application should be made to one or more SME Exchanges for listing and a specified stock exchange should be selected.
2. The issuer has to enter into an agreement for dematerialisation of its securities.
3. Promoters’ shares need to be dematerialised entirely and partly paid-up shares present should be paid up or forfeited.
4. The issuer must make firm financial arrangements, through verifiable means, for at least 75% of the proposed means of finance for the project intended to be funded from the issue proceeds, excluding the amount to be raised through the proposed public offer and existing identifiable internal accruals.
5. The offer for sale by the selling shareholders shall not exceed 20% of the total issue size.
6. The number of shares offered by each selling shareholder shall not be more than 50% of their pre-issue shareholding on a fully diluted basis.
7. The issue proceeds shall not be used, either directly or indirectly, for the repayment of loans or advances taken from the promoter, promoter group, or any related party.

These stipulations as a whole ensure that financially healthy SMEs access the capital market, as well as adhere to the stringent disclosure obligations envisioned by SEBI.

2. Entities Ineligible to Issue SME IPOs

The SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018, provide for certain disqualifications under Regulation 228 to exclude ineligible entities from issuing an Initial Public Offer (IPO).

1.Debarred from accessing the capital market

An issuer shall not issue an IPO if:

1. The issuer, its promoters, promoter group, directors, or selling shareholders have been debarred by SEBI from accessing the capital market.
2. If any of the issuer’s directors or promoters are also the directors or promoters of another company which is debarred from accessing the capital market.

2. Defaulters and Offenders
An issuer is disqualified if:

1. It or its directors/promoters are wilful defaulters or fraudulent borrowers declared by banks or financial institutions.
2. Any director or promoter is a fugitive economic offender, as specified under the Fugitive Economic Offenders Act, 2018.

3. Outstanding Convertible Securities
Issuers are prohibited if there are outstanding convertible securities or rights which entitle any individual to subscribe for equity shares of the issuer.

3. Listing Requirements for SME IPOs on NSE Emerge and BSE SME Platforms:

C.1 Eligibility Requirements for Listing on BSE SME–

• Issue Paid-Up Capital: Not more than ₹25 crores.Net Worth: At least ₹1 crore each of the immediately preceding two consecutive financial years.
• Track Record: Company or promoter with at least 3 years of track record. Proprietorships, partnerships, or LLPs which got converted into companies can take into consideration their earlier operational track record.
• Profitability: Must have recorded operating profits (EBITDA) for at least 2 of the last 3 financial years.
• Leverage Ratio: Up to 3:1.
• Promoter’s Contribution: Minimum 20% of post-issue capital. Dematerialization: 100% of promoter’s shareholding should be in demat form.
• Compliance: No pending defaults or IBC (Insolvency and Bankruptcy Code) proceedings. No material disciplinary or regulatory proceedings in the past three years.
• Board Constitution: Should be in compliance with the Companies Act, 2013. Active Website: Compulsory.
• Pre-Issue Requirements: Legal due diligence, financial restructuring, and no alteration of the promoters in the previous one year.
• Cooling-Off Period: Six months if an application made by a company has already been rejected.\

C.2 Eligibility Requirements for Listing on NSE SME

• Post-Issue Paid-Up Capital: Not more than ₹25 crores.
• Net Tangible Assets: At least ₹3 crores in the last financial year.
• Track Record: At least 3 years of the company or promoter track record. Proprietorships, partnerships, or LLPs that got converted into companies may include their earlier operational track record.
• Profitability: Must have made operating profits (EBITDA) in at least 2 of the last 3 financial years.
• Leverage Ratio: Up to 3:1.
• Promoter’s Contribution: At least 20% of the post-issue capital.
• Dematerialization: 100% of the promoter’s shareholding shall be in demat form.
• Compliance: No pending defaults or IBC proceedings. No material disciplinary or regulatory proceedings during the last three years.
• Board Constitution: Shall be in accordance with the Companies Act, 2013.
• Active Website: Compulsory.
• Additional Requirements: For broking companies and microfinance institutions, additional requirements of higher net worth and operational may be applicable.
• Pre-Issue Requirements: Legal due diligence, recapitalization of finances, and no alteration in promoters in the previous one year.
• Cooling-Off Period: Six months if an application of a company was earlier rejected.
4. Listing procedure

Navigating the journey from a privately held entity to a publicly listed company on the SME platform involves a structured and well-regulated process. Here’s a comprehensive look at how companies prepare for and execute an SME IPO in India:

1. Initial Planning and Evaluation

The process begins with the company internally assessing its need for capital, weighing the pros and cons of going public, evaluating current market conditions, and estimating its valuation potential.

Following this, the Board of Directors convenes to review the eligibility criteria for SME listing, discuss the rationale for raising funds, and evaluate the potential benefits for the business. Upon mutual consensus, the board grants approval to proceed with the IPO.

A SEBI-registered Merchant Banker is then appointed to lead the IPO process. In collaboration with the Merchant Banker, the company also brings on board other key intermediaries such as underwriters, bankers, market makers, registrars, share transfer agents, auditors, and PR consultants.

2. Preparation and Due Diligence

Once the core team is in place, the Merchant Banker conducts thorough due diligence. This involves reviewing the company’s financial statements, key contracts, statutory approvals, promoter credentials, and overall business structure to ensure everything is in order.

Based on this review, the IPO framework is finalized, defining the type of share issue, fundraising targets, and pricing strategy. The Merchant Banker then prepares the Draft Red Herring Prospectus (DRHP), which contains detailed information about the company, its operations, financials, and the proposed offering.

3. Regulatory Approvals

In this phase, the Merchant Banker submits the DRHP along with the IPO application to the chosen stock exchange (either BSE SME or NSE Emerge).

The exchange undertakes a detailed review of the submitted documents. This is followed by a site inspection of the company’s facilities and an interaction with the promoters before the Listing Advisory Committee. Based on the committee’s evaluation, the exchange issues an in-principle approval for listing.

Following this, the final Red Herring Prospectus (RHP), which includes details such as issue dates and pricing is submitted to the exchange and filed with the Registrar of Companies (ROC).

4. Opening of the Public Issue

The IPO opens for public subscription as per the disclosed timeline. During this period, investors can submit their applications to participate in the offering.

Once the issue closes, the stock exchange along with the registrar oversees the allotment process. The basis of allotment is finalized, and shares are credited to investors’ demat accounts. A formal notice is then issued by the exchange confirming the listing and commencement of trading.