SME IPO: 101 Guide with Simplified Processes

The initial public offering of small and medium-sized businesses (SME IPO) is bringing about a paradigm change in the Indian financial markets. Businesses that keep sales, assets or a number of workers below a specific level are known as small and mid-sized companies (SMEs). Small and medium-sized businesses are defined differently in each country.

BENEFITS OF LISTING UNDER SME BOARD

1. Improved recognition and visibility.
2. Improved credibility with key stakeholders, including clients, partners, and staff.
3. Equity financing offers cost- and tax-effective growth prospects including expansion, mergers, and acquisitions.
4. A higher corporate valuation.
5. Enables shareholders’ liquidity.

SME Eligibility in India

The Micro, Small & Medium Enterprises Development Act of 2006 states that MSMEs can be registered under the manufacturing sectors if: In the case of Micro Enterprises, the investment does not exceed INR 25,00,000. In the matter of Small Enterprises, the investment is greater than INR 25,00,000 but not greater than INR 5,00,00,000.

According to the Micro, Small & Medium Enterprises Development Act, 2006, MSMEs can be recognized under the service sectors if: The investment doesn’t exceed INR 10,00,000 in the case of Micro Enterprises. In the case of small businesses, the investment is greater than INR 10,00,000 but not greater than INR 2,00,00,000. In the case of Medium Enterprises, the investment is greater than INR 2,00,00,000 but not greater than INR 5,00,00,000.

The Indian government amended the investment threshold and added an element—annual turnover—to the definition of an MSME. According to the revised definition, MSME can be identified if: In the case of Micro Enterprises, the investment does not exceed INR 1,00,00,000 and the annual turnover does not exceed INR 5,00,00,000. In the case of Micro Enterprises, the investment does not exceed INR 10,00,00,000 and the annual turnover does not exceed INR 50,00,000 per year. In the case of Micro Enterprises, neither the investment nor the yearly turnover can be greater than INR 20,00,00,000.

Steps to Prepare for SME IPO

1. Appoint Merchant Banker as an Advisor
2. Merchant Banker completes Due-diligence and prepares Documentations
3. SME Exchange officer’s Site visit and promoter Interview
4. IPO

Appoint Merchant Banker as an Advisor

There may be more than one merchant banker for an IPO. The merchant banker prepares the red herring prospectus (DRHP). Tying up with a merchant banker of an appropriate profile is important for the long-term success of the IPO. 

Merchant Banker’s Eligibility

A merchant banker possessing a valid Sebi registration under the Sebi (Merchant Bankers) Regulations, 1992 is eligible to act as a Book Running Lead Manager (BRLM) to an issue.

The prospective issuer should take into account the following factors when choosing a merchant banker:-

• Market Making

A company or individual that participates in the two-sided trading of a particular security is referred to as a market maker. It implies that it offers bids and asks in proportion to the size of the market for each security.

Market making is done to provide liquidity to a particular stock and merchant banker makes arrangements for market making.

For a minimum of three years after the security’s issuance date and the date of listing, merchant bankers guarantee market making through brokers in the SME category.

• Industry Focus

Merchant bankers should have a good understanding of the industry in which the company has focused on the Company’s industry.

• Investor relations

Merchant bankers should have good investor relations. IPO subscription is based on merchant banker’s investor relation. Merchant bankers reach out and explain the business to investors.

• Good track Records

Merchant bankers’ past fundraising and successful IPO shows investor trust and ability to raise funds that’s why bankers should have a proven track record.

Merchant Banker completes Due-diligence and prepares Documentations

The offer document, also known as the DRHP, is an initial registration document. The paper includes details about the firm’s finances, promoters, and company operations. To prepare papers, the Merchant Banker would first undertake due diligence on the Company, which would involve reviewing all of the financial documents, material contracts, government approvals, promoter information, etc. The Merchant Banker shall plan and document the IPO structure, share issuances, and financial requirements.

Application procedure:

• Submission of DRHP/Draft Prospectus – 

These documents are created by the Merchant Banker and submitted as needed to SEBI and the Exchange.

• Verification & Site Visit – 

BSE verifies the documents and processes the same. The Exchange official should pay a visit to the company’s location. The Listing Advisory Committee requests an interview with the Promoters.

• Approval – 

On the Committee’s suggestion, BSE grants an In-Principle approval, provided that the Issuer Company has assembled all of the prerequisites.

• Filing of RHP/Prospectus – 

These documents, which include the issue’s opening and closing dates, are submitted by Merchant Banker to the ROC. When the ROC gives its clearance, they inform the Exchange of the issue’s opening dates and the necessary paperwork.

IPO

The Initial Public Offer begins and ends on time. Following the IPO’s completion, the Company provides the Exchange with the necessary paperwork to finalise the allocation basis.

• Underwriting Obligation

1. The issue shall be 100% underwritten. 
2. The MB shall underwrite at least 15% of the issue size on his own 
3. The issuer in consultation with MB may appoint underwriters and the MB may agree with underwriters at the issue price in case of under subscription. 
4. All the underwriting arrangements made by MB shall be disclosed in the offer document 
5. The MB shall file an underwriting to SEBI that the issue has been 100% underwritten along with the list of underwriters etc.

SME Stock Exchange

SME exchange refers to the trading platform of a recognised stock exchange with national trading terminals that SEBI has approved to list the specific securities issued in accordance with Chapter IX of the SEBI Book. This includes stock exchanges that have been recognised for this purpose, but it excludes the Main Board. There are now 2 stock exchanges in the nation that provide SME exchanges.

1. NSE’s SME Exchange i.e., NSE EMERGE.
2. BSE’s SME Exchange i.e., BSE SME.

POST LISTING COMPLIANCE UNDER SEBI(Listing Obligations and Disclosure Requirements) REGULATION, 2015

1. Regulation 33: Financial Results: – Each half-year, the listed firm must submit financial results to the stock market within 45 days.

2. Regulation 47: Advertisements in Newspapers: – Listed firms who have listed their specified securities on the SME Exchange are exempt from the requirements of this rule. 

3. Regulation 31: Holding of specified securities and shareholding pattern:- The listed firms that have listed their specified securities on SME Exchange must provide to the stock exchange(s) a statement reflecting the holding of securities and ownership pattern separately for each class of securities on a semi-annual basis within twenty-one days of the end of each half-year.

Listing Requirements

NSE EMERGE:-

Incorporation

The Issuer should be a company incorporated under the Companies Act 1956 / 2013 in India.

Post Issue Paid-Up Capital

The post-issue paid-up capital of the company (face value) shall not be more than Rs. 25 crores.

Track Records

1. Track record of at least three years of either

•  The applicant seeking listing; or
• The promoters****/promoting company, incorporated in or outside India or
• Proprietary / Partnership firm and subsequently converted into a Company (not in existence as a Company for three years) and approaches the Exchange for listing.

Promoters mean one or more persons with minimum 3 years of experience in the same line of business and shall be held at least 20% of the post-issue equity share capital individually or severally

2. The company/entity should have operating profit (earnings before interest, depreciation and tax) from operations for at least any 2 out of 3 financial years preceding the application and its net worth should be positive.

Other Listing Conditions

The applicant company has not been referred to the erstwhile Board for Industrial and Financial Reconstruction (BIFR) or No proceedings have been admitted under the Insolvency and Bankruptcy Code against the issuer and Promoting companies

The company has not received any winding-up petition admitted by an NCLT / Court.

No material regulatory or disciplinary action by a stock exchange or regulatory authority in the past three years against the applicant company.

Disclosure

The following matters should be disclosed in the offer document:

Any material regulatory or disciplinary action by a stock exchange or regulatory authority in the past one year in respect of promoters/promoting company(ies), group companies, companies promoted by the promoters/promoting company(ies) of the applicant company.

Defaults in respect of payment of interest and/or principal to the debenture/bond/fixed deposit holders, banks, FIs by the applicant, promoters/promoting company(ies), group companies, companies promoted by the promoters/promoting company(ies) during the past three years.

The applicant, promoters/promoting company(ies), group companies, companies promoted by the promoters/promoting company(ies) litigation record, the nature of litigation, and status of the litigation.

In respect of the track record of the directors, the status of criminal cases filed or the nature of the investigation being undertaken with regard to the alleged commission of any offence by any of its directors and its effect on the business of the company, where all or any of the directors of the issuer have or has been charge-sheeted with serious crimes like murder, rape, forgery, economic offences.

BSE SME:-

Listing Requirements

The following are the listing requirements for the BSE SME Exchange:

1. The SME must be a Limited Company.
2. The issuer or SME must have a post-issue face value capital of Rs.1 crore to Rs.25 crores. Entities having a post-issue face value of over Rs.25 crores have to be necessarily listed on the Main Board of the BSE.
3. Net Tangible Assets of the SME must be at least Rs.1 crore, as per the latest audited financial results.
4. Net Worth (excluding revaluation reserve) must be at least Rs.1 crore as per the latest audited financial statements.
5. The company must have a track record of distributable profits in terms of Section 205 of the Companies Act, 1956, for at least two out of the immediately preceding three financial years. Otherwise, networth must be at least Rs. 3 crores.
6. The company must mandatorily facilitate trading in DEMAT securities and agree with both Depositories, namely, Central Depository Services Limited and National Securities Depository Limited.
7. The company must have a website.
8. The company should not have any reference before the Board for Industrial and Financial Reconstruction (BIFR).
9. The company should not have any winding-up petition that has been accepted by a Court.
10. The issue must be a 100% underwritten issue. Merchant bankers must underwrite 15% on their accounts.
11. The Merchant Banker to the issue is responsible for market making for a minimum of three years through a stock broker who is registered as a market maker with the SME Exchange.
12. The company must have a minimum of 50 investors while listing through IPO.

Documents Required for Listing on the BSE SME Exchange

A. Along with the application for using the name of the Exchange in the offer document, the following documents/information shall be filed by the Company with the Exchange:

1. 10 copies of the draft offer document.
2. Soft copy of the Prospectus for uploading on the website
3. Copy of resolution passed by the Board of Directors for the issue of securities
4. Copy of the shareholder’s resolution under 62(1)(c) of Companies Act, 2013
5. Certificate from the Managing Director / Company Secretary or PCS / Statutory or Independent Auditors stating the following:
   1. The Company has not been referred to the Board for Industrial and Financial Reconstruction (BIFR).
   2. There is no winding-up petition against the company, which has been admitted by the court or a liquidator has not been appointed.
   3. There has been no change in the promoter/s of the Company in the preceding year from the date of filing an application to BSE for listing in the SME segment.
6. Copy of all show cause notice(s)/order(s) issued by any regulatory authority (e.g. SEBI, ROC, RBI, CLB, Stock Exchange etc.) & Correspondence there too.
7. PAN & TAN of the Company.
8. DIN & PAN of Promoters and Directors.
9. Printed Balance Sheets, Profit & Loss Accounts and Cash Flow Statements for the preceding 5 years (or for such applicable periods)
10. Copies of major orders/contracts/ received/ executed/ in-hand should be kept ready and available for inspection. A statement of material contracts duly certified by a practising Chartered Accountant/practising Company Secretary should be submitted. The Company should also state the place, time and date where these documents can be inspected
11. A statement containing particulars of the dates of, and parties to all the material contracts, agreements (including agreement for technical advice and collaboration), concessions and similar other documents (except those entered into in the ordinary course of business carried on or intended to be carried on by the company) together with a brief description of the terms, subject matter and general nature of the documents.
12. Details of the present or any previous application of the Company/Group Company for the listing of any securities have been rejected earlier by SEBI or by any stock exchange and reasons thereof.
13. Name of the exchange which is proposed to be designated Exchange for the issue, if decided.
14. Copies of agreements and memoranda of understanding between the Company and its promoters/ directors.
15. Articles & Memorandum of Association of the Company.
16. A certificate from the statutory auditor/practising chartered accountant certifying compliance with conditions of Corporate Governance as stipulated in clause 52 of the listing agreement and circular no.SEBI/CFD/DIL/CG/1/2004/12/10 dated October 29, 2004, issued by the Securities and Exchange Board of India (SEBI). The company should also give the composition of various committees as required under the said clause.
17. Association, if any, of the directors/ promoters of the Company with any public or rights issue made during the preceding 10 years.
18. One Time Listing Fees of Rs. 50,000/- plus applicable Service Tax. (Details of all applicable fees for SME Listing are attached)
19. The date of opening of the public issue is to be intimated as soon as it is finalized.