SME IPO Process

SME IPO is a process by which small and medium enterprises can raise capital from the public and get listed on the stock exchange. In India, there are 2 platforms for SME IPO - BSE SME and NSE Emerge. An SME company can choose one of these platforms to go public.

SME Listing Procedure

SME IPO is a process by which small and medium-sized companies can raise money from the general public and be listed on the stock exchange. For an issuing company, the SME IPO works as follows:

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 the other intermediaries such as 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 requires a review of all documents, including all financial documents, material contracts, government approvals, promoter information, etc.
• The Merchant Banker prepares the IPO structure, share issuance and financial requirements.
• The merchant banker prepares the draft 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 Document (RHP) to the Exchange. The RHP is an extension of the DRHP with additional details such as the opening and closing dates of the issue. The Merchant Banker submits these documents to ROC (Registrar).

4. Public Offering

The IPO is opened and closed 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 BSE/NSE 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 cooperates with a commercial bank and submits the required reports to the stock exchanges from time to time.

SME IPO Step-by-step process

Below is a step-by-step guide to going public for SME companies:

1. Assessing Suitability for an SME IPO

The first step on the way to SME IPO is to check the eligibility criteria set by each stock exchange. For more details, please refer to the chapter SME IPO Eligibility Criteria. Also note, 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). These are entities registered with SEBI to assist companies throughout 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 Merchant Banker's key responsibilities include:

• Pre-IPO capital restructuring;
• Due diligence and preparation for the IPO;
• Dematerialization 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 finalizing 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. Exchange authorities review records, conduct site visits and other investigations.

After that, 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 document (DRHP) and files it with the stock exchange. It takes about a month to prepare DRHP, as it contains a lot of information about the company and the public offering.

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 such as:

• Issue dates (opening, closing, allotment, and quotation).
• Issue price.
• Updated financial information.
• Other required updates.

6. Roadshow

The Merchant Banker is now promoting the IPO to raise investor awareness. The merchant banker introduces the IPO. This includes physical and online meetings with investors in various cities.

7. SME IPO Launch

The IPO will open and close as scheduled. Once the IPO opens, it can be determined if the IPO is oversubscribed or undersubscribed. This is tracked separately for each 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 shall publish an allotment basis setting out the details of the IPO allotment process.

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.

Key Takeaways

• The SME IPO process begins with the appointment of merchant bankers. They are responsible for proper consultation, documentation and due diligence.
• There are many parties involved in the SME IPO. This includes exchanges, merchant banks, registrars, clearing houses, custodians, market makers, underwriters, fund managers, banks, auditors, etc.
• Any SME IPO takes about 3 months of time.