When a company first offers its shares for public sale, it is known as an Initial Public Offering (IPO). Companies typically launch their IPOs to raise capital for growth, acquisition, or expansion, provide an exit route for existing investors, gain investors’ trust, and increase brand visibility.
Like mainboard companies, small and medium-sized companies can also float their IPOs for the above reasons. SME IPOs allow investors to buy shares of promising companies during their initial stages and participate in their growth stories.
This blog aims to provide a comprehensive understanding of SME IPOs, their meaning, and the process of applying for them. Along the way, we’ll touch upon essential concepts such as Demat accounts, differences between SME IPOs and mainboard IPOs, and risks and advantages associated with SME IPOs. Keep reading.
What Is An SME IPO?
An SME IPO is the process by which small and medium-sized enterprises offer their shares to the public for the first time to raise funds. These IPOs are typically launched on dedicated stock exchange platforms, such as the NSE EMERGE and BSE SME platforms in India. Once an SME IPO is listed, the shares are traded on these platforms.
Unlike large-scale IPOs from major corporations, SME IPOs are tailored to the unique needs of smaller businesses, enabling them to gain access to equity capital markets and achieve better visibility.
The key features of SME IPOs include:
Smaller Issue Size: An SME IPO’s size is relatively smaller than mainboard IPOs.
Less Stringent Regulations: The stock exchanges and regulatory bodies have simplified regulatory requirements for SMEs to encourage participation.
Niche Investor Base: SME IPOs primarily attract informed retail investors and institutional investors familiar with smaller companies’ growth potential.
Higher Minimum Investment: Although the IPO sizes are smaller, retail investors need a higher minimum investment to apply for an SME IPO. As per SEBI guidelines, the minimum application size for SME IPOs must be Rs. 1 lakh.
Difference Between Mainboard And SME IPOs
The table below depicts the differences between mainboard and SME IPOs:
Parameter | Mainboard IPO | SME IPO |
Post-issue paid-up capital | Post-issue paid-up capital for mainboard IPOs must be at least Rs. 10 crores | Post-issue paid-up capital for SME IPOs must be between Rs. 1 crore to Rs. 25 crore |
Minimum Investment Amount | Ranges between Rs. 10,000 to Rs. 15,000 | Minimum application size must be Rs. 1 lakh |
Underwriting | IPO underwriting is not mandatory | IPO underwriting is mandatory |
Traded On | NSE, BSE, and other stock exchanges | SME platforms of stock exchanges |
The lot size for trading | Traders can sell individual shares irrespective of the lot size | Trading is allowed only in lots |
IPO Time Frame | 6 months | 3 to 4 months |
Public Reports | Companies need to provide quarterly public reports | Companies need to provide half-yearly public reports |
Allottees | The minimum number of allottees should be 1000 | The minimum number of allottees should be 50 |
How To Apply For An SME IPO?
The process to apply for an SME IPO is the same as it is for mainboard IPOs. Below is the step-by-step guide to apply for an SME IPO:
Open a Demat Account
A Demat account is mandatory to invest in any IPO, including SME IPOs. It is a digital repository for your securities, including shares and bonds. If you do not already have one, you can open Demat account with a registered Depository Participant (DP), such as HDFC SKY. All it takes is filling out an online account opening form, uploading the required documents, and linking your Demat account with a savings bank account. Once your Demat account is active, you can use it to apply for an IPO.
Go To the ‘Upcoming IPOs’ Section
Go to the “Upcoming IPOs” section in your stock trading app. Here, you will find the list of upcoming mainboard and SME IPOs. You can create a filter to see only the SME IPOs and select the one you want to apply for.
Analyse And Pick the SME IPO
From the list of upcoming IPOs, you need to analyse and pick the right SME IPO to apply for. You can review the company’s Draft Red Herring Prospectus (DRHP) or Red Herring Prospectus (RHP) to understand its financial health, business model, and growth prospects. You can also evaluate the company’s competitive landscape and market potential before applying for its IPO.
Apply For The IPO Through ASBA
You can now apply for the SME IPO of your choice through the Application Supported by Blocked Amount (ASBA) method. You must enter the number of shares or lots you want to apply for and your bidding amount before entering your UPI (Unified Payments Interface) details. Then, you can go to your UPI app and validate the ASBA request. The bid amount will be blocked in your bank account until you receive the allotment of shares.
Wait For the Allotment
The allotment process begins after the IPO closes. You can check the allotment status on the registrar’s website by entering your PAN (Permanent Account Number) or application number. If allotted, the shares will be credited to your demat account before the listing date. If not, the bank will release the blocked funds.
Risks And Benefits Associated With SME IPOs
Applying for SME IPOs has advantages and risks. As an investor, it’s crucial to be aware of these and make a well-informed decision.
Advantages
Potentially High Returns: You can earn higher returns if the SME company grows.
Low Price: You can get comparatively lower-priced shares by investing during the early stages of a company.
Portfolio Diversification: Investing in SME IPOs can be a good move to diversify your investment portfolio.
Risks
Limited Liquidity: SME shares may experience lower trading volumes post-listing.
Higher Volatility: Share prices can fluctuate significantly due to lower market participation.
Business Risks: SMEs are often more vulnerable to market disruptions and operational challenges.
To Conclude
SME IPOs present a unique opportunity for investors to participate in the growth stories of promising small and medium enterprises. However, to maximise your returns, staying informed of upcoming and Closed SME IPOs and applying strategically is crucial. Always conduct thorough research and understand the associated risks before diving in.
With HDFC SKY, you can open a free Demat account within minutes and unlock the vast potential of the stock markets. You can enjoy competitive brokerage rates and invest in a gamut of instruments, including mutual funds, ETFs, and more.