How can you invest in SME IPOs?

IPOs are the current flavour in stock markets and when we hear the word IPO, we think of big companies with global businesses giving investors a good investment opportunity with short-term or long-term gains. But IPOs are not only limited to such big companies, there is a segment of small and medium businesses too that can launch IPOs and attract significant investments. These SME IPOs are launched on separate exchange platforms but can nevertheless be a good addition to a portfolio. 

Discussed below is the meaning of SME IPOs and how to invest in them. 

Read More: Should you apply to all IPOs being launched? 

What is an SME IPO?

SME IPOs, as mentioned above, are IPOs or Initial Public Offerings launched by small and medium enterprises and were first launched in 2012. The shares of such companies can be listed on different stock exchanges in BSE and NSE and can be traded like regular shares. SME IPOs have the potential of providing huge returns although the risk associated is high as they belong to the SME sector. The SME IPOs are listed on the BSE SME platform and NSE Emerge Platform once the IPO is approved and the shares are duly allotted.

The requirements for an SME to be listed on BSE or NSE include,

• A minimum paid-up capital, net tangible assets, and net worth of Rs. 3,00,00,000 each.
• The maximum paid-up capital of the company cannot exceed Rs. 25,00,00,000
• The entity needs to have certified annual returns for at least the past three years
• The company needs to have at least 2 years of distributable profits out of the immediately preceding three years.
• There have to be a minimum of 50 allottees when the shares are listed on the stock exchanges. 
• A certificate from the auditors stating that there is no default in interest payment made by the promoters or their holding companies. 
• The trading lots on SME IPOs should be a minimum of 100 to 10,000.
• The minimum application amount should be Rs. 1,00,000. 

How is SME IPO Listed?

The listing process for SME IPOs is a bit different than regular IPOs. The listing process for the same is detailed below. 

• SMEs have to first appoint a merchant banker or an SME IPO consultant to guide the company in the underwriting of the issue. 
• The next step is to ensure the financial data of the company should reflect the true and fair view of such a company and should not have any discrepancies.
• The SME will have to finish the pre-IPO preparations and file a DRHP (Draft Red Herring Prospectus). This document will provide a snapshot of the proposed IPO and can act as a guide for investors in terms of what they can expect. 
• The DRHP will be duly verified to ascertain that the facts stated are correct and investors as well as other stakeholders can submit their feedback on the same too.
• Once the data is verified and the changes proposed are accepted, the SME IPO will be given in-principle approval to go ahead with the IPO. 
• The IPO will then be launched and open for subscription across the notified category of investors.
• Once the entire process of IPO is completed and the shares are allotted to the eligible investors, they are then listed on the respective stock exchanges of BSE and NSE. 

How to apply for SME IPOs?

The prerequisites for investors to invest in an IPO are similar to those in the case of regular IPOs. Investors will need PAN Card, a Demat-cum-Trading Account, and a valid and active bank account with a registered mobile number. The application process for the SME IPO can be through offline mode or through online mode. The details of the same are mentioned below.

1. Online Mode 

The online mode for applying or investing in an SME IPO is,

1. The first step is to login to the Demat account using valid credentials
2. The next step is to click on the link for the SME IPO and select the required categories like the type of investor, and the number of lots that the investor wishes to bid for.
3. The amount for investment is then blocked as per ASBA and upon allotment, if the number of shares applied for is not allotted, the balance amount will be credited back to the investor’s bank account. 
4. Offline Mode

The offline mode of applying for an SME IPO requires the investors to get the physical form of ASBA application from Registered Brokers, investment consultant banks, or any other sources. This form has to be duly filled out and submitted to the brokers or banks. Once the IPO is closed the shares are allotted as per the allotment formula of the company and the same will be credited to the Demat account. These shares will then be listed on the SME stock exchanges. 

Are SME IPOs a good bet?

SME IPOs are a good option for startups and other organizations in the SSME category to attract funds for the growth and development of their business. These companies are in the initial growth stage of their business and therefore are riskier. However, when backed by strong financials and a good growth trajectory, they have the potential to provide higher returns for investors. These IPOS are a good opportunity for investors with a high-risk appetite. Also, the lot sizes and the minimum application of these IPOs are bigger than regular IPOs and there are liquidity concerns associated with the SME IPOs too. Therefore, investors looking for short-term gains or listing gains may find it difficult to make money if the IPO has not generated a good buzz. 

Conclusion

SME IPOs are a good option for businesses as well as investors as the former can get access to funds which is a crucial requirement for any company and the latter can get the opportunity to tap into the early success story of the organization. Listing on the stock exchanges also warrants higher transparency which is added benefit for the investors as well as instills confidence in the lenders towards the organization. 

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