A Primer on SME IPOs

A. Definition of SME

As per the classification made by the government, SMEs are defined by their revenues or assets below a certain threshold, as below:

Criteria	Small Enterprise	Medium Enterprise
Investment in Plant, Machinery or Equipment	Not more than Rs. 10 Cr.	Not more than Rs. 50 Cr.
Annual Turnover	Not more than Rs. 50 Cr.	Not more than Rs. 250 Cr.

B. Objects of the Issue for SME IPO

The object of the issue tells investors how the company intends to use the funds raised. At a high level, they are divided into two parts:

1. Fresh Issue: Fresh issue is the issuance of new shares of the company and their sale to investors. The funds raised are intended for use in the company.

2. Offer for Sale (OFS): Offer for Sale is the sale of shares by an existing shareholder. The company does not receive any proceeds from the OFS.

The Fresh Issue and the OFS may be used individually or in combination. Most companies intend to use the proceeds of the offering for the following purposes:

• To meet working capital requirements

• General corporate purposes

• Offering for sale a portion of shares by the selling shareholders

• Acquisition of plant and machinery

• Investment in acquisitions/joint ventures

• Spending on marketing and branding

• Repayment of loans

C. SME Listing Procedure

1. Planning:

• The company conducts an internal review and discussion of the need for funds, the pros and cons of an IPO, valuation, and market conditions.

• The company then convenes a board meeting to discuss SME listing standards, listing requirements, company valuation, and reasons for raising capital.

• The board approves the IPO and gives in-principle approval.

• The company appoints a Merchant Banker.

• The company appoints other intermediaries including underwriters, bankers, market makers, registrars, transfer agents, auditors and PR agencies in consultation with the Merchant Banker

2. Preparation:

• The Merchant Banker conducts due diligence. This includes a review of all documents, including financials, contracts, government approvals, promoter information, etc.

• The Merchant Banker prepares the IPO structure, share issuance and financial requirements.

• The Merchant Banker prepares the Draft Red Herring Prospectus (DRHP).

3. Approval process: In this phase, the application process for the IPO begins.

• The Merchant Banker submits the IPO application to the Exchange for approval.

• The Merchant Banker submits the DRHP document to the exchange.

• The exchange BSE or NSE reviews the documents.

• The Exchange official conducts a visit to the company's site.

• The promoters are invited for an interview with the Listing Advisory Committee.

• The Exchange issues an in-principle approval on the recommendation of the Committee.

The Merchant Banker submits the Red Herring Prospectus (RHP) to the Exchange and to the ROC (Registrar). The RHP is an extension of the DRHP with additional details such as the opening and closing dates of the issue.

4. Public Offering:

• The IPO opens and closes as scheduled. Once the underwriting is completed, the company files the documents with the exchange so that the basis of allotment can be determined.

• The exchange determines the basis of allotment and issues the notice of listing and trading.

• Shares are transferred to investors' accounts and trading begins on the day of listing.

5. Post-issuance compliance: Based on the regulations, the company submits the required reports to the stock exchanges from time to time.

D. Timelines for SME IPOs

An SME IPO process takes 3 – 6 months, depending on the level of preparation by the company.

Step	Timeline	Detail
Due-Diligence Process	6-12 weeks	• Board Approval • Approval of various intermediaries • Due Diligence • Prepare DRHP • DRHP exchange filing.
Filing and Regulatory Approval	3-6 weeks	• Receive in-principle approval of exchange • Filing of offer documents with ROC • Filing of final prospectus with exchange and SEBI.
Issue Program	2-4 weeks	• Pre - issue Preparations • Offer opens • Monitors of issue Collections • Closure of offer • Statutory ads at various stage
Post Issue Formalities	2 weeks	• Finalise Basis of Allotment • SEBI and exchange submission • Listing Formalities and permission • Trading on SME Platform • Grievance redressal, if any

E. SME vs. Mainboard IPO

SMEs with a minimum post-issue capital of Rs 1 crore and a maximum capital of Rs 25 crore can apply for an IPO through the SME platform. Mainboard companies are large companies with paid-up capital of at least Rs 10 crore after the issue.

Although the shares of both, SMEs and mainboard companies are listed on the exchanges, the listing criteria and procedure for mainboard and SME IPOs are different, as given below:

Listing Parameters	Mainboard IPO	SME IPO
Post-issue paid-up capital	Minimum: INR 10 Cr.	Minimum: INR 1 Cr.; Maximum: INR 25 Cr.
Minimum allottees in the IPO	1000	50
IPO underwriting	Non-mandatory	Mandatory: 100%
Offer document vetting	By SEBI	By Exchange
IPO Timeframe	6 months onwards	3 to 6 months
IPO application size	Min: INR 10,000 - 15,000	Min: INR 1 Lakh
Participation of the QIB	50% compulsory subscription by QIBs	Not Mandatory
Market making (acting as an agent for the purchase and sale of shares)	Not mandatory	Mandatory (for 3 years from the date of listing)
Track Record	Stringent track record norms	Relaxed track record norms
Listing	Can list on both exchanges	Can list on only one exchange

F. Step-by-step Process for an SME IPO

1. Assessing Suitability for an SME IPO: The first step is to check the eligibility criteria set by each stock exchange (as given in Annexure 1). Having all documents and submissions updated on time reduces the cost impact for an SME IPO.

2. Appointment of a Merchant Banker: The Company now appoints a Merchant Banker (lead manager). Registered with SEBI, these entities assist companies through the IPO process.

   The Merchant Banker helps the company choose an exchange and engage other intermediaries such as bankers, registrars, market makers and underwriters. The key responsibilities of the Merchant Banker include:

   • Pre-IPO capital restructuring

   • Due diligence and preparation for the IPO

   • Dematerialisation of shares

   • Valuation and pricing of the offering

   • Preparation of offering documents for public offering

   • Appointment of intermediaries

   • Submission of draft offering document to SME Exchange

   • Release of offering document and receipt of approval from SME Exchange

   • Filing of prospectus with ROC

   • IPO Launch

   • IPO management - receipt of applications & other

   • IPO Closing

   • Assistance in finalising the basis of allotment

   • Receipt of Exchange Approval

   • Refunds/Allotment Process

   • Listing & Market Making

   • Restatement of financial statements by Peer Review Auditor

3. SME IPO Application: The Merchant Banker completes the IPO application form and submits it to the stock exchange. The Exchange reviews records, conducts site visits and other investigations. Post which, the exchange approves the IPO application. This means that the issuing company meets all the requirements.

4. Drafting of the prospectus: The Merchant Banker prepares the prospectus (DRHP) and files it with the stock exchange. It takes about more than a month to prepare DRHP. The Exchange issues an in-principle approval once the DRHP review process is complete.

5. Red Herring Prospectus: The Merchant Banker files a red herring prospectus (RHP). The RHP document is an extension of the DRHP prospectus with additional details, including:

   • Issue dates (opening, closing, allotment, and quotation)

   • Issue price

   • Updated financial information

   • Other required updates

6. Roadshow: The Merchant Banker promotes the IPO to raise awareness amongst investors.

7. SME IPO Launch: The IPO opens and closes as scheduled. Once the IPO opens, it can be determined if the IPO is oversubscribed or undersubscribed by investor type (institutional, non-institutional, retail, etc.) and is available in real-time on the exchanges' websites.

8. SME IPO Allocation: The IPO registrar, along with the exchange, is responsible for the allotment of shares. The IPO allotment status determines the number of shares allotted to investors in an IPO. The allotment status is published on the Registrar's website. The Company then publishes an allotment basis for the IPO.

9. SME IPO Listing: The Stock Exchange publishes an announcement for the listing of IPO shares. The listing circular contains information such as the number of shares, type of security, closing price, ISIN, security code, symbol, etc.

   The company's shares are traded on the stock exchange under a specially assigned ticker, ISIN number or script code.

10. Post Listing: The following reports should be submitted to the stock exchange after listing:

• Invitations to board meetings.

• Annual reports and shareholder structure.

• Half-year financial results.

• Limited Review Reports due every 45 days after the end of the first half year.

• Audit reports due 60 days after the end of the second half-year/fiscal year.

• Quarterly Corporate Governance Reports.

G. SME IPO Intermediaries & their Roles

IPO intermediaries are the entities (companies or individuals) that assist an issuer in completing an IPO and ensuring successful listing. These include:

1. SEBI: The Securities and Exchange Board of India (SEBI) is the regulatory body for Indian securities. All other intermediaries must comply with the rules set by SEBI while helping the issuing company with the IPO.

   Note: Unlike mainboard IPOs, the SME IPO prospectus does not require SEBI approval. Prospectus documents are reviewed and approved by the exchanges at SME IPO.

2. Stock Exchange: The stock exchange serves as a platform for trading stocks. Both the BSE and NSE offer platforms for SME IPO - the BSE SME and NSE Emerge respectively.

   The role of stock exchanges in SME IPOs includes:

   • Review and approval of the application for SME IPO
   • Review and approval of the DRHP document
   • Facilitation of the IPO bidding and allocation process
   • Listing the shares of the SME IPO on the stock exchange

3. Merchant Banker (Lead Manager): A Merchant Banker is the first intermediary hired by the issuing company. It orchestrates the entire IPO process – starting with due diligence for an IPO, and completing only after the post-listing process. Their role includes:
   
   A. Providing information to the issuing company: The Merchant Banker introduces the issuer to all the details of the IPO process. It provides issuers with information and instructions regarding:

   • The issuer's eligibility for listing

   • Capital requirements

   • Market rules and regulations

   • The IPO process

   • Pre- and post-listing needs
   
   B. Due Diligence: Due diligence involves gathering, organising, and reviewing the documentation for an IPO. This phase includes the following:

   • Gathering organisational data

   • Gathering licensing and tax data

   • Compiling audited reports

   • Compiling board and employee information

   • Financial information, including liabilities and assets

   • Market growth information

   • Status of company assets (movable and immovable assets)
   
   The Merchant Banker assesses whether or not the company is eligible for an IPO, based on the criteria set by the exchanges. These include:
   
   • Minimum tangible assets of the issuer (should be Rs 1.5 Cr.), positive operating profit, net worth and financial track record of at least 3 years
   
   • Paid-up capital after the issue (not more than Rs 25 Cr.)
   
   The Merchant Banker must also review and prepare documents such as material contracts and government approvals and the retails of promoters/ management/ shareholders and their names.
   
   Thereafter, the Merchant Banker determines the optimal issue structure and prepares the prospectus.
   
   C. Planning the IPO structure: The issuer and the Merchant Banker jointly plan the structure of the SME IPO. Then they plan the offering. This includes the following information:
   
   • The type of securities applied for listing

   • The number of securities

   • Fully paid-up/ partly paid-up shares

   • Par value

   • Lot size

   • Minimum order quantity

   • Price determination

   • The proportion of anchor investors; retail investors; qualified institutional buyers; and non-institutional investors

   • Booking period

   • Percentage of employee reservation, employee discount, market maker share, etc.
   
   D. Appointment of intermediaries: SME IPOs require multiple intermediaries such as a registrar, law firm, banker, compliance officer, etc. These intermediaries must be registered with and approved by SEBI.
   
   E. Drafting of contracts: The Merchant Bankers draft key agreements, documents and resolutions required for an SME IPO process. These documents include:
   
   • Tripartite Agreement with NSDL, CDSL and Registrar to Issue.
   • Underwriting Agreement
   • Market-Making Agreement.
   • Agreement with Bankers to Issue.
   • Agreement with Registrar to Issue.
   • Board/Shareholder Resolutions
   • Certificates, declarations of representation, etc.
   • Draft public notices, announcements, etc.
   • Forms/applications to be filed with the Exchange, RoC and other regulatory agencies.
   
   F. Drafting of the Prospectus: The Lead Manager drafts the DRHP that contains all information necessary to enable investors to make an investment decision, including details on the offering, industry overview, financial statements, IPO timelines etc.
   
   G. Submission of DRHP to Stock Exchange/ SEBI/ RoC: The Lead Manager files the DRHP with the stock exchange, SEBI and the RoC. In case of an SME IPO, the stock exchange reviews and processes the documents. The Exchange grants the "InPrinciple" approval on the recommendation of the Committee, subject to the issuing company meeting all requirements. The RoC issues its approval.
   
   H. Underwriting: An underwriter undertakes the risk of buying the shares in the event of under-subscription. By law, all SME IPOs must be 100% underwritten. Merchant Bankers must underwrite at least 15% of the shares of an SME IPO. The remaining 85% is arranged through a third-party fund manager. The company pays an underwriting fee (generally in the form of a discount on the share price) to the underwriters.
   
   I. IPO roadshow and publicity: Prior to this stage, the filing of the application and the preparation of the prospectus are completed. The Merchant Banker organises a roadshow wherein the company and the Merchant Banker together make presentations to institutional investors, mutual funds, pension funds, hedge funds, etc. explaining the company's business model, financials, legal disclosures, growth prospects, and details of the offering.
   
   J. Listing and post-issuance formalities: The listing process is completed when:
   
   • The documents have been approved by SEBI and the stock exchanges.
   • The shares are listed on the stock exchange under the launch of the IPO.
   
   After preparing the listing formalities, the merchant bank's role continues. It is also responsible for post-listing documentation, compliance and other formalities.

4. Chartered Accountant (CA): The CA assists SMEs with due diligence for regulatory compliance, RoC compliance, certification of restated financial statements, audit of financial statements etc. The role of a Chartered Accountant in the IPO of SMEs includes:
   
   • Financial due diligence
   • Business forecasting and valuation
   • Reviewing 3 years of restated financial information
   • Certification of financial information (income statement, cash flow statement, or balance sheet)
   • Statement of Tax Benefit
   • Certificate on Object of the issue
   • Compliance with disclosure requirements
   
   The Merchant Bankers oversee this process, and the CA is responsible for the execution.

5. Company Secretary (CS): The CS of the issuer advises the company on corporate structure. The CS must make recommendations on:
   
   • Corporate and capital structuring
   • Details of group companies
   • Litigation and material developments
   • Compliance with LODR and corporate governance
   • Compliance with the listing agreement
   • Brokerage and securities audit

6. Registrar: Registrars and Transfer Agents (RTAs) are independent financial institutions registered with SEBI and the stock exchanges. Registrars maintain records of issuance and ownership of company shares. The registrar is responsible for the following in the pre and post-IPO process:
   
   • Work with custodians (CDSL, NSDL) on behalf of the Company to obtain the ISIN number and enter into tripartite agreements with the custodians.
   
   • Assist the Company in dematerialising the shares held by the existing shareholders.
   
   • Review the sections on the issuance procedure in the prospectus.
   
   • Assist the company with the design and printing of the IPO application forms.
   
   • Collect IPO application forms from banks and other designated intermediaries.
   
   • Collect IPO application data from stock exchanges.
   
   • Aggregate the data, i.e., the total number of bids/ shares uploaded and the total number of amounts blocked.
   
   • Retrieve PAN, DP ID and client ID details of valid beneficiary accounts from custodians.
   
   • Reconcile bids received from designated intermediaries and exchanges, and notification to authorities in case of discrepancies.
   
   • Create a physical book for the bids received from the anchor investor and delivery to the company and the Lead Manager.
   
   • During the issue period, collect the bid files from the exchanges/ Lead Manager of ASBA forms worth up to Rs. 2,00,000 on a daily basis and reconcile the DP ID, the clients ID and PAN with the depository database and provide a file to the SCSBs for blocking the funds on a daily basis.
   
   • Transmit the final bid file received from the exchanges, which includes application form numbers and bid amount, to all escrow banks and the SCSBs for validation/ reconciliation.
   
   • Reconcile the compiled data received from the Exchanges and all SCSBs with the custodians' database to verify the accuracy of DP ID, client ID and PAN.
   
   • Notify designated intermediaries of any errors in the bid data with a request to submit the corrected data within a specified time period.
   
   • Obtain PAN and MICR codes associated with the demat account from custodians. Verify this data with the bid file.
   
   • Reject bids if the DP ID, ID and PAN indicated in the application form and entered by the designated intermediaries in the electronic bidding system of the exchanges do not match the DP ID, ID and PAN available in the database of the depositories.
   
   • Reconcile electronic data collected by the exchanges and designated intermediaries with the information on blocked amounts received from the SCSB.
   
   • Prepare a complete list of valid bids (after all rejections, including rejections for technical reasons) and presentation of this list by category.
   
   • Finalise the allocation basis and have it approved by the Exchange.
   
   • Finalise the list of persons entitled to the allotment of shares.
   
   • Prepare the transfer plan for the banks.
   
   • Instruct the banks to release the funds blocked for the bids.
   
   • Arrange for the shares to be credited to the allottees.
   
   • Transfer the funds from the escrow accounts to the public issue account to eventually credit the company.
   
   • Provide all relevant statements/reports for the completion of the basis of allotment, listing and trading, post-issue monitoring reports, etc.
   
   • Provide data enabling the Company to publish the allotment notice within the prescribed time.
   
   • Settlement of investors' complaints and grievances.
   
   • In case of failure of the issue: issuing appropriate instructions to the SCSBs to release the relevant ASBA accounts and to the trust banks to refund the anchor investors.

7. Legal Advisor: A legal advisor's job is to gather and review information to determine whether or not the issuer is legally eligible for an IPO. It performs legal due diligence to ensure that the company and its directors and promoters are eligible for an IPO. The roles of the legal advisor in the IPO include:
   
   • Provide legal advice on legal matters.
   • Draft legal documents, memoranda and related documents.
   • Review of legal materials.
   • Preparation of dispute resolution procedures.
   • Monitoring the implementation of legal clauses.

8. Banker: The bankers have to be instructed to coordinate the deposit of subscription monies from investors. The banker sends payment instructions and/or mandate collection requests to the UPI.
   
   A company may designate one or more banks to assist in handling all banking-related tasks associated with the offering.
   
   The banker clarifies the status of the funds so that the Registrar can finalise the basis of allotment.

9. Market Maker: Market Makers facilitate the liquidity of SME stocks via their 2-way quotes, contributing to better price discovery. They regularly buy and sell shares on the stock market at predetermined prices.
   
   Market makers are registered members of the exchanges' SME platform. In most cases, the Lead Manager with a stockbroker license also works as a market maker.
   
   Market-making is mandatory for SME IPOs for 3 years from the date of listing. This is referred to as the "mandatory market-making period". If the SME moves to the main board after 2 years, the period for mandatory market-making is reduced accordingly.
   
   For SME IPOs, the issuing company must issue 5% of the issue volume to the market maker. Further, the company must pay an additional fee for market-making services, which is calculated for three years in advance.
   
   As per the stock exchange guidelines, a market maker:
   
   • Should provide a 2-way quote for 75% of the time in a day.
   
   • Should guarantee the execution of the order at the specified price and quantity for the quotes provided by him.
   
   • Shall provide quotes from the date of listing of the relevant security and shall be subject to the market-making guidelines set by the Exchange.
   
   • Is not responsible for maintaining the price of the shares.
   
   Note:
   • A Market Maker should have sufficient inventory on the day of allocation.
   • A market maker should not buy shares from promoters during the market-making period.
   • An issue cannot have more than five market makers.
   • A market maker must serve in this capacity for three years.

10. Underwriter: The underwriter to the issue reduces the risk for the SMEs. This is because when the IPO is underwritten, any unsold shares are purchased by the underwriter in accordance with the underwriting agreement.
    
    Each SME IPO must be 100% underwritten. The underwriter must cover at least 15% of the shares. The issuer can underwrite the remaining shares.
    
    The role of an Underwriter in an IPO includes:
    • Compliance with the contract clauses of the Underwriting Agreement.
    • Responsible for selling the predetermined number of shares.
    • Responsible for the purchase of the remaining or unsold shares.
    • Co-organising the IPO roadshow, advertising and marketing. Ensuring the success of the roadshow.
    • Assist the issuer in determining share valuation, whether overvalued or undervalued.
    • Advising and supporting the issuer in the IPO process.

11. Other Intermediaries:
    
    Grading Agency:
    The grade given to the initial public offering (IPO) of shares by a credit rating agency (CRA) registered with SEBI is referred to as IPO classification. For SMEs, engagement of a grading agency is not mandatory. •
    
    Advertising/ PR Agencies:
    • Advertising the IPO and increasing visibility.
    • Roadshows and promotional activities.
    • Dissemination of IPO documents in newspapers

Annexure 1: SME IPO Eligibility

There are two SME IPO platforms in India: BSE SME and NSE Emerge. An SME could choose one of these two platforms for its IPO.

The SME has to meet the SME IPO eligibility criteria set by the stock exchanges and SEBI. The BSE and NSE exchanges have quite similar requirements for an SME IPO, as given below:

Criteria	NSE Emerge	BSE SME
Registration
Company Registration	Registered under the Companies Act 1956	Registered under the Companies Act 1956
Paid-up Capital
Post-issue Paid-up Capital	Not exceeding Rs 25 crores	Not exceeding Rs 25 crores
Track Record
Company Track Record	At least three years	At least three years
Positive Net Worth	In at least two out of three financial years	Positive for 2 preceding full financial years (BSE: Net Tangible Assets should be Rs 3 crores in the preceding financial year)
Winding up petition by NCLT or court	Not filed	Not filed
Not referred to BIFR	Certificate Required	Certificate Required
Insolvency and Bankruptcy Code proceedings	Not under proceedings	Not under proceedings
Exclusion from accessing capital market by the Board	Not excluded	Not excluded
Classification as fugitives or delinquents under Fugitive Business Offenders Act 2018	Not classified	Not classified
Directors not under investigation or criminal proceedings	Documentation required	Documentation required
Articles of incorporation without restrictive clauses	No restrictive clauses	No restrictive clauses
No disciplinary proceedings, defaults on interest/principal, or pending litigation	No such history	Documentation required for litigation
Additional Criteria for SME IPOs
Minimum application and trading lot size	₹ 1,00,000	₹ 1,00,000
Minimum number of allottees	50	50
IPO underwriting	Mandatory, 15% by Merchant Banker	Mandatory, 15% by Merchant Banker
Market Makers	Mandatory	Mandatory
Documents
Detailed documents list	NSE SME IPO website	BSE SME IPO checklist
Checklist for in-principle approval	Check List- Final Listing	Listing Application Form
IPO Registration Form	Yes	Yes
Fixed Price Issue, Book Building Issue	Yes	Yes
Listing Agreement	Yes	Yes

Note: Unlike mainboard IPOs, SME IPOs can only be listed on one exchange.

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